(Bloomberg) -- The world’s most powerful central bank is making clear it thinks the law is on its side if President Donald Trump tries to remove Jerome Powell as Federal Reserve chairman.
White House lawyers have equipped Trump with a possible blueprint for demoting Powell by stripping him of his chairmanship and leaving him as only a governor, according to people familiar with the matter. But the Fed, which faces frequent attacks from Trump for not being more accommodating to his economic agenda, has hinted for the second time that it won’t back down easily.
In response to inquiries Tuesday about the White House review of the legality of removing Powell, Fed spokeswoman Michelle Smith offered a direct response, saying the chair can “only be removed for cause.”
For his part, Powell has previously demonstrated his resolve: “The law is clear that I have a four-year term. And I fully intend to serve it,” he told the CBS News program “60 Minutes” in March.
The latest episode in Trump’s battle with the central bank was revealed as the Fed entered a two-day policy meeting, after which Powell will hold a news conference. Trump, meanwhile, officially launched his re-election bid on Tuesday, a campaign in which he’ll ask voters to keep him in the White House largely on the strength of the U.S. economy.
He has set up the Fed and Powell as a scapegoat if there’s any downturn before election day, and before leaving the White House for his political rally in Orlando, didn’t dismiss the idea of removing the chairman. “Let’s see what he does,” Trump told reporters.
But Powell’s and Smith’s statements suggest possible friction if Trump acts on a plan to remove the chairman. It appears “the Fed has done their own analysis and it’s given them sufficient confidence to plant a flag,” said Sarah Binder, a senior fellow at the Brookings Institution in Washington who has written a book on the Fed’s relationship with Congress called “The Myth of Independence.”
Some senior administration officials have said they don’t think Powell can be removed. Asked in November if Trump could fire Powell, the president’s chief economic adviser, Larry Kudlow, said: “a Fed chair can only be removed for cause.”
The Fed may feel compelled to show some firmness given how little support it has received from Senate Republicans who shy from crossing the president, Binder said. “They’re staking their ground in the absence of any clear signal from the Hill, taking a stand on whether the chair can be removed.”
A chorus of Democrats including Senate Minority Leader Chuck Schumer warned Trump away from any action that could undermine the Fed’s independence. Alabama Republican Senator Richard Shelby expressed the most concern among his party, saying on Tuesday that the Fed should remain “above politics” and do “what’s best for the economy and what’s best for the long-term stability of our currency, too.”
Trump has expressed skepticism of other central bankers as well. Earlier Tuesday, he criticized European Central Bank President Mario Draghi for signaling a rate cut and pushing down the value of the euro. He told reporters that he wants a “level playing field” from the Fed.
Bloomberg News reported in December that Trump discussed firing Powell out of frustration over the central bank’s interest rate increases. Earlier this year, Trump asked White House lawyers to explore his options for removing Powell as chairman, according to people familiar with the matter.
Trump’s team conducted the legal analysis and concluded that it would be highly questionable to fire Powell without cause but that a case could be made for replacing him with a sitting Fed governor, the people said, requesting anonymity to discuss internal deliberations. Those findings remain closely held within the White House.
While Trump still regularly expresses his displeasure with the Fed in tweets, talk of removing Powell has subsided. Trump told Powell in a March phone call, “I guess I’m stuck with you,” according to the Wall Street Journal.
The Federal Reserve Act provides explicit protection for all Fed governors against removal by the president except “for cause.” Courts have interpreted the phrase to require proof of some form of legal misconduct or neglect of basic duties. A disagreement over monetary policy wouldn’t meet that bar.
But if Trump tries to remove him, Powell may be unwilling to challenge him in courts out of concern about damage to the institution and possibly to financial markets, said Mark Spindel, chief investment officer at Potomac River Capital.
“In doing that calculus, I think Jay would run to ground and decide it’s just not worth the fight,” he said.
