Trump Says He Won’t Fire Powell. His Fed Battle May Not Be Over Yet.

In his first term, President Trump toyed with ousting Jerome H. Powell out of anger that the Federal Reserve chair was moving too slowly to cut interest rates. Mr. Trump refrained from doing so, but continued to publicly attack Mr. Powell and his colleagues for keeping borrowing costs too high.

The Fed ultimately did cut rates but not because of Mr. Trump’s jawboning. The president’s trade war with China risked roiling the U.S. economy so significantly that the Fed moved preemptively in 2019 to stave off a painful downturn. There was little downside to doing so: Inflation was not remotely a concern at the time, giving officials the flexibility to eventually reduce rates three times.

Now back in office, Mr. Trump has again begun berating Mr. Powell and the Fed, urging them to lower borrowing costs. But the economic circumstances today are drastically different than those of 2019, setting the stage for a more intense showdown between the central bank and Mr. Trump.

On Tuesday, Mr. Trump said he had “no intention” of firing Mr. Powell despite having lambasted him over several days, calling the Fed chair a “major loser” and saying his “termination cannot come fast enough!”

But the clash between Mr. Trump and the Fed is likely to linger. On one side is a Fed now much more hesitant to reduce borrowing costs because of fears that the broad-based tariffs Mr. Trump has announced on virtually all U.S. trading partners will reignite inflation and slow economic growth. On the other side is a White House wanting immediate relief and taking steps to infringe on the central bank’s longstanding political independence.

“This is an existentially threatening moment for the institution,” said David Wilcox, who is a senior fellow at the Peterson Institute for International Economics, the director of U.S. economic research at Bloomberg Economics and an ex-leader of the Fed’s research and statistics division. “We may be on the cusp of throwing away an asset that has taken decades to accumulate.”

Financial markets have taken notice, whipsawing in what is likely a partial preview of the fallout should Mr. Trump follow through on his earlier threats.

The Fed’s independence from the White House is seen as sacrosanct across Wall Street. It gives the central bank the ability to take necessary but sometimes politically painful actions, like raising borrowing costs in order to mitigate inflation. Proponents of the Fed’s independence say that it helps to not only foster a more stable economy but also a more robust financial system.

That independence was crucial to the Fed’s ability to rein in inflation after the worst surge in decades in the wake of the pandemic. The central bank initially misread the extent of the inflation threat posed by the shutdown of global supply chains and was forced to adjust course quickly once it was clear it was dealing with a much more persistent issue. Officials rapidly raised interest rates above 5 percent and kept them there until last year.

After lowering interest rates by a percentage point, the Fed is now in a holding pattern as it waits to see what the economic effects of the president’s policies will be.

High Bar For Cuts

Even before Mr. Trump’s return to the White House, inflation was proving to be stubbornly sticky. As of February, the Fed’s preferred gauge was stuck at 2.8 percent.

Mr. Trump’s tariffs risk stoking inflation while crimping growth. That combination — which carries the whiff of stagflation — risks pitting the Fed’s congressionally mandated goals of pursuing 2 percent inflation and a healthy labor market at odds with one another, forcing the central bank to make what Mr. Powell recently described as a “difficult judgment” of what to prioritize.

The Fed’s recent miss on inflation, coupled with the uncertainty surrounding Mr. Trump’s policies, is a “recipe for a Fed that starts late and goes slow,” said Vincent Reinhart, a former Fed economist who is now chief economist at BNY Investments.

So far, a majority of Fed officials have tacitly endorsed that approach, saying they can afford to be patient on taking any action on interest rates because of the relative strength of the U.S. economy that the Trump administration inherited. The central bank is poised to wait for noticeable cracks in the labor market before lowering rates — something that could take time to materialize.

Officials have yet to talk about raising rates in response to Mr. Trump’s tariffs, likely reflecting their thinking that the pullback in economic activity will be so significant as to over time weigh on price pressures. But Dean Croushore, who served as an economist at the Federal Reserve Bank of Philadelphia for 14 years and is now at the University of Richmond, warned the central bank against dismissing that possibility outright.

“I have a feeling inflation is going to go up so much in the short run that any Fed action to cut rates would not be justified, and they have to prepare the markets for higher rates because of that,” he said.

Can a President Fire a Fed Chair?

The prospect of a stalemate on interest rates is worrying enough, but the Trump administration’s efforts to challenge a legal precedent that underpins the Fed’s political independence has stoked far greater unease.

The Federal Reserve Act says members of the central bank’s seven-strong Board of Governors can be removed only “for cause,” which is interpreted as serious misconduct and other violations. That is backed up by a 1930s Supreme Court ruling commonly referred to as Humphrey’s Executor.

Mr. Trump’s Justice Department is now seeking to overturn that standard as part of a broader legal fight regarding the president’s recent decision to fire the top brass at several independent agencies over policy disagreements. Mr. Powell said he does not expect cases set to be heard by the Supreme Court to apply to the Fed, suggesting there could be some kind of carve out for the central bank.

“The court has a route available to it if it wants to distinguish the Fed, and there are some powerful reasons for it to do so,” said Daniel K. Tarullo, a former Fed governor who focused on regulatory matters. Several conservative judges on the Supreme Court, including Brett M. Kavanaugh, Samuel A. Alito Jr. and Chief Justice John G. Roberts Jr., have at one point signaled that they may view the Fed as distinct, bolstering the prospects that the Fed would be safeguarded in some way.

Other Pressure Points

Beyond the looming court cases, Mr. Trump has also, via executive order, sought to encroach on the Fed’s ability to set regulation. The central bank is one of the three primary institutions responsible for shaping the rules by which Wall Street must abide. Even though the executive order exempted monetary policy decisions, it presents a tricky challenge for the central bank.

Mr. Tarullo said that if the president can take action against the Fed’s board of governors because of disagreements over regulation, “then the supposed monetary policy independence of those very same seven people becomes, at the very least, extremely murky.”

So long as the administration pursues policies that chip away at the Fed’s independence, Graham Steele, a longtime financial regulation lawyer, warned that the “bedrock of what has made the U.S. such a strong economy and the global safe haven” will remain under strain.

“The Fed chair doesn’t need to be removed in order for some of this damage to be done,” said Mr. Steele, who is also a former Treasury Department official. He added that there just needs to be “more attention and more questions” about whether that could happen or if the Fed would acquiesce in any way.

“What’s going to give here at the end of the day?”