Firing or not, Trump may be setting up Powell as the fall guy if the economy tanks

• Trump has stepped up his attacks on Powell in recent weeks, calling him a "major loser" on Monday.
• Trump has said his policies are working and has tried to shift attention to interest rate policy.
• He could be setting up Powell to take the heat if the economy slows, market commentators say.

For all his back-and-forth on tariffs, Donald Trump has been crystal clear on one issue in recent weeks: the performance of Fed chief Jerome Powell. Based on the president's assessment, it's not good.

He's been vocal about his desire to fire the head of the central bank before his term is up in 2026, a move that Powell himself has said would be illegal.

But regardless of whether he fires Powell, Trump is doing something important when he blasts the Fed Chair as a "major loser." His aim, according to market observers, may be to redirect blame on the central bank, not his own unpredictable trade policy, in the event of an economic downturn.

"Trump obviously is worrying that the economy weakens. Then Americans will blame him for it. But now, his explanation will be that, 'it wasn't me that caused this recession, it was the Fed by not accommodating my tariffs,'" the Yardeni Research president told Business Insider in an interview. In a note last week, Yardeni said Trump was setting Powell up as the "fall guy" if the economy stumbles.

That message has sharpened in recent weeks, with Trump haranguing the Fed to cut rates immediately, or otherwise take the heat when things turn for the worse.

Last week, the president took to Truth Social to say that the Fed should have cut rates "long ago" and "should certainly lower them now," describing Fed Chair Powell as "TOO LATE AND WRONG."

Investors have reacted negatively to the White House's attacks on the Fed chair and the potential for central bank independence to be diminished.

On Monday, as Trump fired off more withering criticisms of Powell, stocks plunged along with traditional US safe-haven trades like Treasurys and the dollar.

In a statement to BI, a White House spokesperson said:

"In line with his right to free speech as an American citizen and duty to our country as Commander in Chief, President Trump has always been transparent about his thoughts when he sees something going poorly, such as Federal Reserve's inaction holding our economy back."

Trump, meanwhile, has boasted of the success of his own economic policies.

In the last week, he's pointed to signs of lower inflation in the US and the success of tariffs on US imports.

"The United States is taking in RECORD NUMBERS in Tariffs, with the cost of almost all products going down," Trump wrote in a Truth Social post. "Likewise, INFLATION is down. Promises Made, Promises Kept!"

"Of course, this is Trump's way of setting Powell up to take the blame," Jay Woods, the chief global strategist at Freedom Capital Markets, told BI.

Woods said markets don't seem to be buying Trump's story about how things are going. Investors, in fact, have praised the Fed chair for navigating an unprecedented era of volatility since 2018.

"Let's recognise that, in the last 7 years, Powell has dealt with a huge funding squeeze, the pandemic, 4-decade high inflation, regional banks crumbling, a 'soft landing', and now a global trade war," Michael Brown, a senior research strategist at Pepperstone, wrote on Monday. "I'd argue he's done a damn good job."

Brown told BI that he also sees Trump as trying to shift the blame for any future economic damage that tariffs end up causing.

"I think what we're really talking about here is sort of a cynical political ploy where Trump is trying to shift the blame for not only the negative economic fallout, but the negative financial market fallout from those policies onto Fed, who, frankly, is somewhat defenseless in the whole thing."

What's next for markets

The Fed appears unlikely to cut rates soon as it monitors tariffs' impact on inflation.

Speaking at the Chicago Economic Club last week, Powell said the central bank was "well positioned to wait for greater clarity" before adjusting monetary policy.

Ironically, Trump putting up a fight with the Fed could end up pushing the economy closer to a downturn, Yardeni said, given the immense amount of uncertainty that's rocking markets.

"This all increases the likelihood that the economy is going to fall into a recession, because the negative wealth effect from the stock market has the potential to really cause consumers to retrench," Yardeni said.

Pepperstone's Brown had a similar warning for markets and the persistence of "sell America" as long as Trump keeps up his attacks on Powell and the Fed.

"I think there's a direct correlation around the greater the attacks on the Fed chair from president, the more incentive market participants will have to continue trimming their exposure to the United States," Brown said.