Investors should brace for potential fireworks, as the sequel to the Trump-vs-Powell drama may soon be underway as the Federal Reserve holds its final meeting of 2024 on Dec. 18, 2024.
President-elect Donald Trump is set to take office in January 2025, and Wall Street is wondering whether he'll clash with Fed Chair Jerome Powell over the central bank’s rate policy.
With a history of tensions between the two, all signs point to a possible replay of the interest-rate drama that dominated headlines during Trump’s first term.
Fed's December Meeting: A Crucial Decision Ahead of Trump's Inauguration
The Federal Reserve has already cut interest rates twice this year, with a 50-basis-point cut in September followed by a 25-basis-point cut in November.
Currently, the market is giving a 65% probability of another 25-basis-point cut in December, according to the CME FedWatch tool.
This final meeting of the year will also feature the release of the Fed's "dot plot" and economic projections, offering a glimpse into policymakers' expectations for future rates, GDP growth, inflation, and unemployment.
Notably, the dot plot, which illustrates each Fed member's anticipated path for interest rates, will offer insight into how policymakers view future rate cuts
For investors, this meeting is a critical checkpoint.
As Trump prepares to take office, the Fed's interest-rate decision and outlook unveiled on Dec. 18 could set the stage for a renewed power struggle between the president and the central bank—a dynamic that could bring volatility to financial markets.
Trump Vs. Powell: The Sequel To Their Rocky Relationship
Trump's previous term was marked by a contentious relationship with Powell, as the president frequently pressured the Fed to cut rates further and faster. Now, Trump's second term reawakens concerns about political interference at the Fed.
The tension between Trump and Powell became evident once again when Powell was asked at the Fed’s November meeting if he would resign if requested by the president.
His one-word response: "No."
Powell then clarified that the president does not have the legal authority to remove him, stating that "the President is not permitted under the law" to fire a Fed chair.
Yet, Powell's defiance may be tested if Trump attempts to influence Fed policy more aggressively, raising questions about the central bank's independence—a cornerstone of a stable, market-oriented economy.
Read also: Powell Dismisses Talk Of Resignation After Trump Victory, Says ‘Policy Is Still Restrictive’
Political Pressure Mounts: Calls to "End the Fed" Gain Traction
Powell's response didn't sit well with some of Trump's allies.
Sen. Mike Lee (R-Utah) took to social media platform X, posting that the Federal Reserve should be under presidential control, aligning with Trump's broader vision of executive authority. "The Executive Branch should be under the direction of the president. That's how the Constitution was designed," Lee wrote, adding the hashtag #EndTheFed.
Billionaire Elon Musk, one of Trump's top campaign donors, retweeted Lee's post, showing his alignment with the idea.
The idea of bringing the Fed under Treasury control, while certainly unorthodox from an economic perspective, is gaining traction among certain circles in Trump's camp, signaling the type of political pressure Powell could face if his policy decisions don't align with Trump's economic goals.
Can Trump Actually Fire Powell? Legal Hurdles and Precedents
Though Trump may want Powell out, the Fed chair is legally protected against arbitrary dismissal.
According to the Federal Reserve Act, Fed governors can only be removed "for cause," a phrase that courts have interpreted narrowly to mean misconduct or neglect of duty—not merely policy disagreements with the president.
"If the president were to succeed at this, that would mean every future chair is subject to removal at the whim of the president,” former Fed general counsel Scott Alvarez told The Wall Street Journal.
"I don't think that's a precedent Jay would want to set, and that's why I think he would fight it. This is a humongous precedent," he added.
Recent rulings by conservative Supreme Court justices, including Brett Kavanaugh and Samuel Alito, have indicated a unique view of the Fed as distinct from other regulatory agencies, further strengthening Powell's legal position.
Yet, Yahoo Finance last week indicated that the language used by the Federal Reserve Act does not specifically address the Fed chair’s role, leaving some ambiguity around whether Trump could remove Powell before his term ends in 2026.
While the likelihood of a Trump-led dismissal effort succeeding seems slim, the threat of a drawn-out legal battle could still add uncertainty to markets.
Betting Markets Weigh In: Powell's Job Security in Question
The uncertainty surrounding Powell's future is already influencing betting markets, fueling speculation among traders.
CFTC-regulated Kalshi has launched a market on whether Powell will still be Fed Chair by the end of 2025.
As of now, betting-implied odds suggest a 22% chance that Powell could be out of office by the end of next year. This reflects the market's belief that while legally challenging, Trump's influence—or potential political maneuvering—could pose a real threat to Powell's tenure which expires in May 2026.
As Dec. 18 approaches, all eyes will be on the Fed's final meeting of 2024, where the groundwork may be laid for a renewed Trump-Powell showdown.
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Donald Trump, Jerome Powell image created using Shutterstock and Fed photos with a background generated using artificial intelligence via MidJourney.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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