Unprecedented! What kind of storm would be triggered if Trump fired Powell?

President Trump's continued pressure on Powell has once again caused turmoil in the markets and sparked speculation about the future situation of the beleaguered Fed chair if he were to be dismissed. This move has no precedent in American history and is almost certain to trigger a landmark lawsuit that will affect both Washington and Wall Street, ultimately to be decided by the Supreme Court. The latest turmoil on July 16 stemmed from reports that Trump was considering taking action against Powell. The Fed chair has long been targeted by Trump for ignoring his calls for interest rate cuts. Trump quickly denied the reports, stating that the likelihood of Powell being fired is "very low, unless he must resign due to 'fraud'." This referred to the issue of overspending on renovations at the Fed headquarters. Trump and his allies are focusing on this issue, attempting to use it as a "legitimate reason" to dismiss Powell. According to Section 10 of the Federal Reserve Act, Federal Reserve Board members (including the chair) can be removed for "cause." Whether overspending on renovations constitutes a reason for dismissal will become a new legal proposition. If Trump were to dismiss Powell, what could happen next? The dismissal would take effect immediately, but Powell could immediately sue in federal court in Washington and request an injunction to be reinstated. During the trial, both sides would submit briefs, with Powell arguing that the dismissal lacked justification. The judge would hold a hearing to determine whether to issue an injunction, with the key being whether Powell can convince the judge that he and the Fed would suffer "irreparable harm" if the status quo is not maintained during the litigation. The ruling on the injunction is crucial, as the substantive trial of the case could take months or longer. If the injunction is denied, the dismissal would take effect immediately, and Vice Chair Philip Jefferson would temporarily assume the role of chair (Jefferson was nominated by Biden in 2022, while Powell was nominated by Trump in 2017). If the injunction is granted, Powell could remain in his position until the end of the lawsuit, with either party able to appeal, potentially leading the case to the federal appeals court and ultimately the Supreme Court. The Supreme Court's ruling on the injunction is likely to set the tone for the case. While the losing party can continue litigation, the possibility of the Chief Justice overturning the decision is very slim. If the case were to go to the Supreme Court, how might it rule? In May, the Supreme Court hinted that Trump cannot dismiss Powell without cause. While allowing Trump to dismiss two other agency officials without cause in the past, a majority of the justices made it clear that this ruling did not apply to the Fed, calling it a "structurally unique quasi-private entity." Nonetheless, the ruling still leaves open the possibility of Powell being dismissed for cause, with Trump's track record of winning cases in the Supreme Court (including last year's criminal immunity and several policy enactments) giving him an advantage. Jed Shugerman, a presidential power expert at Boston University, stated, "They are clearing a path for Trump." However, Jonathan Shaub, an administrative power expert at the University of Kentucky's J. David Rosenberg Law School, believes that even if the courts deem the dismissal unlawful, there are still variables regarding Powell's reinstatementhe proposes two grounds. The first is a June 27 Supreme Court ruling regarding birthright citizenship restrictions, which narrowed a judge's ability to issue "equitable relief" orders (i.e., compelling or prohibiting certain actions) ; the second is a previous opinion from Justice Neil Gorsuch suggesting that courts should refrain from restoring high-ranking officials to their positions. What are the key points of contention in the case? The case will hinge on Trump's reasons for the dismissal. If Trump accuses Powell of mismanagement in the renovation project as a "just cause," the case will likely focus on the project details and the individuals responsible for overspending decisions. The legal community generally defines "just cause" in three ways: inefficiency, neglect of duties, and misconduct. However, these terms proposed by Congress over a century ago still lack clear definitions. Judges will need to determine, based on arguments from both sides, whether Powell's role in the overspending project falls under any of these categories. However, there are very few clear precedents in this area. The Supreme Court has never heard a case involving a president having just cause to dismiss an official. What is the controversy surrounding the Fed renovation project? The Fed is currently undergoing its first major renovation since the completion of its two main buildings in Washington in the 1930s. The Fed states that the project aims to lower long-term costs through operational integration. After the renovation plan was approved by the Fed Board of Governors in 2017, the budget continued to expand. According to budget documents for 2025, the total estimated cost of the project has increased from $1.9 billion in 2023 to $2.5 billion. The Fed explains that the increase in the budget is mainly due to design changes negotiated with regulatory agencies, discrepancies between estimated and actual costs, and unexpected issues such as the discovery of asbestos. Several of Trump's allies are using the renovation issue to build a case for firing Powell. The Director of the Federal Housing Finance Agency, Bill Pulte, accused Powell of making false statements about the project details during a Senate hearing on June 25 (without providing details), claiming that this constitutes a "just cause" and calling for a congressional investigation. Fed officials, however, maintain that Powell's statements were accurate. Russell Vought, the Director of the Office of Management and Budget, posted on July 10 that the project was an "extravagant waste of remodel." Trump has argued that Powell should be investigated for fraud related to the renovation. At Powell's request, the Fed Inspector General has launched an investigation into the cost overrun of the project. How long would it take for a new chair to be appointed if Powell were to leave? A new chair would need to be nominated by Trump and confirmed by the Senate, a process that usually takes weeks or even months. During this time, the Federal Reserve Act dictates that the Vice Chair "shall act as Chair in the absence of the Chair." How would the dismissal of Powell affect interest rates? Replacing the chair would not necessarily achieve Trump's desired interest rate cutsinterest rates are currently set by the Federal Open Market Committee (FOMC) chaired by Powell. The new chair would need to persuade the other 18 members (including the 12 voting members) to support rate cuts. How would financial markets react? Investors value the independence of the Federal Reserve. If independence is undermined, the Fed's commitment to controlling inflation would lose credibility, and a surge in inflation expectations would severely impact financial asset prices. Within 30 minutes of Bloomberg's report on Trump's possible dismissal of Powell, the S&P 500 index fell by 1%, the yield on 30-year Treasury bonds rose by 10 basis points, and the Bloomberg Dollar Spot Index fell by 1.2%. Bloomberg economist Anna Wong noted that if Trump were to actually dismiss the Fed chair, it would ultimately lead to a slowdown in economic growth, an increase in unemployment, and intractable inflation.