What could happen if Donald Trump attempts to dismiss the head of the Federal Reserve?

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US President Donald Trump has stated that he has no immediate intentions to dismiss the head of the Federal Reserve, Jerome Powell, despite several media reports suggesting otherwise.

In recent months, Trump has repeatedly criticized Powell for not reducing interest rates and what he perceives as an overly expensive renovation of the Fed’s headquarters in Washington.

On Wednesday, he reiterated his criticism, mentioning that while it was “unlikely” Powell would be removed soon, it could happen “unless he has to leave for fraud”. There have been no allegations of fraud, and the Fed has defended itself against the criticism.

Trump also mentioned to reporters that he had discussed the potential removal of Powell with Republican lawmakers during a meeting on Tuesday.

No president in recent US history has gone after the head of the Federal Reserve, which is supposed to operate independently from the government.

So, does Trump have the power to fire Powell, and what would the economic fallout be of any attempt to do so?

Can the president fire the Federal Reserve chief?

According to the Federal Reserve Act of 1913, the chair of the bank can only be dismissed “for cause”, which is broadly interpreted as relating to extraordinary cases of gross misconduct.

Speaking to reporters on Wednesday, Trump appeared to double down on the Fed’s renovation as a new line of attack, stating that it was “possible there’s fraud involved” while complaining about the cost of the project.

“There could be something to that, but I think he’s not doing a good job. He’s got a very easy job to do. You know what he has to do? Lower interest rates,” he added.

These comments have sparked concerns among Democrats that Trump might be using the building renovations as a pretext for Powell’s removal.

If Trump were to fire Powell, over what many view as a policy dispute, it would be unprecedented and could end up in court.

The ongoing debate among US economists, scholars, and analysts focuses on whether the Supreme Court — which has often ruled in favor of Trump during his second term — would intervene to uphold the central bank’s impartiality.

A ‘dreadful idea’ and ‘very significant’ market reaction

Former Fed officials and financial experts have consistently warned that the economic fallout from any attempt to fire Powell would be swift and far-reaching.

“If there were an effort by the president to remove the chair, the market reaction would be very significant — well before any court had an opportunity to pass on the issue,” former Fed board member Daniel Tarullo told the Harvard Gazette in late April.

In an interview with CNBC on Wednesday, Roger Altman, who was deputy Treasury secretary under former President Bill Clinton, described Trump’s impulse to interfere with the Fed as “a dreadful idea,” pointing to the economic downturn other countries that have meddled with their central banks have faced.

Republican Senator Thom Tillis of North Carolina delivered a spirited defence of an independent Fed on Wednesday.

“There’s been some talk about potentially firing the Fed chair,” said Tillis, a member of the Senate Banking Committee, which oversees the Fed and confirms presidential nominations to its Board. Subjecting the Fed to direct presidential control would be a “huge mistake,” he said.

Meanwhile, a research paper by Wolfe Research, which gamed out possible market scenarios if Trump decides to go after Powell, stated that regardless of whether it was deemed legal or not, the result would be an extreme “mess”.

“We expect, as does everyone else, that it would be significantly negative for markets, likely driving both an equity selloff and a counterproductive spike in long-term yields,” the firm wrote in a briefing.

— Additional reporting by Reuters