Former Federal Reserve Chair and current Fed Governor Jerome Powell has cautioned that the credibility essential for a strong and stable economy would be undermined if any U.S. President could remove Federal Reserve officials over policy disagreements.

In a speech prepared for receiving the "John F. Kennedy Profile in Courage Award" in Boston last Sunday, Powell stated, "If any administration found a way to remove Federal Reserve officials simply because of policy disagreements, future policies would do the same."

Powell indicated that under such circumstances, the public would lose trust in the Federal Reserve, no longer believing its decisions are based on what is best for all Americans. He added, "The Fed's credibility would be lost. Our credibility has been built and maintained over decades. We have a responsibility to guard this invaluable asset for our citizens and for generations to come."

As the core monetary authority in the United States, the credibility of the Federal Reserve directly impacts the effectiveness of monetary policy transmission, stable expectations in financial markets, and public confidence in economic performance, playing a significant role in the smooth functioning of related sectors.

This marks Powell's first public comments since being succeeded by Kevin Warsh as Fed Chair. Powell's remarks come as the U.S. Supreme Court considers the tenure of Fed Governor Lisa Cook.

Former President Donald Trump had sought to remove Cook based on unsubstantiated allegations of mortgage fraud, which Cook has denied. The question of whether she can remain on the Fed is now before the Supreme Court while lower courts address the merits of the case.

Powell emphasized that the Federal Reserve has "clear and direct" legal protections designed to shield monetary policy from political interference. Simultaneously, he acknowledged severe partisan divisions in U.S. politics but called on Americans to unite in defending the "higher principles that define the American spirit."

He stated, "Foremost among these principles is respect for the rule of law." Powell stepped down as Fed Chair earlier last month. One of his key political legacies is his sustained defense of the Federal Reserve against persistent pressure from Trump and his allies, who sought to force the Fed to lower interest rates.

These pressure tactics included personal verbal attacks against Powell, efforts to remove Cook, and a criminal investigation into Fed building cost overruns, which has since been shelved. In January, a significant favorable turn for Powell occurred when he publicly condemned the criminal investigation, sparking a wave of support, including from some Republicans.

After leaving the Chair role, Powell chose to remain as a Fed Governor, citing concerns over attacks against the central bank. Although Powell's speech reiterated dissatisfaction with the Trump administration, his selection by the John F. Kennedy Library Foundation as a co-recipient of this year's award is itself seen as a statement.

The Foundation stated that Powell was honored for "steadfastly defending the independence of the Federal Reserve while enduring years of personal attacks and threats from the highest levels of government." For new Fed Chair Kevin Warsh, the policy choices he advances amid current heightened U.S. inflationary pressures will also impact the Fed's credibility.

Warsh faces the dilemma of whether to raise interest rates to prevent inflation from further deviating from the Fed's 2% target, or risk damaging his credibility as an "inflation fighter" from the outset—a quality that will ultimately measure his success or failure.

In brief remarks after being sworn in as Fed Chair last month, Warsh emphasized that the Fed should fulfill its duties of controlling inflation and achieving full employment with "independence, clear judgment, and firm resolve." He added that the Fed's mission is "to maintain price stability and achieve maximum employment."

Trump's pressure on the Fed to cut rates is evident. However, Warsh must demonstrate to the market that the Fed will not become an enforcement arm for the White House's short-term political goals. Although Trump encouraged Warsh to "remain independent" during the swearing-in ceremony, the relationship between the White House and the Fed remains highly sensitive due to past political controversies surrounding policies during Powell's tenure.

More subtly, Powell's continued presence as a Fed Governor means Warsh will still face the influence of the former Chair within the policy committee. This could provide a buffer for policy continuity but might also make differences between old and new policy approaches more apparent.

Additionally, it is worth noting that Warsh has previously expressed a desire to change how the Fed measures inflation. Warsh stated a preference for using a "trimmed mean" inflation measure over the traditional core Personal Consumption Expenditures (PCE) price index favored by the Fed.

The "trimmed mean" inflation indicator, which Warsh highlighted and praised, is based on the PCE price index. It aims to filter out temporary noise and reveal a purer inflation trend by regularly excluding the most extreme price movements in specific categories each month.

This algorithm, which removes outliers, has caused the trimmed mean measure to read lower than the previously favored PCE over recent periods. Analysts suggest that if the FOMC under Warsh's leadership shifts to favoring the trimmed mean inflation as a basis for decisions, the door to rate cuts could still be opened through a statistical loophole, even if traditional PCE remains elevated due to geopolitical conflicts and energy premiums.

This implies that the focus of subsequent interest rate path negotiations would subtly shift from the absolute level of inflation to a contest over the "definition of the trend." However, economists warn that this adjustment could complicate the Fed's monetary policy operations.

Aditya Bhave, an economist at Bank of America, pointed out that although the current trimmed mean indicator shows lower inflation, this strategy carries risks. Bhave warned that food and energy prices, currently excluded from core PCE, could still influence the trimmed mean reading during volatile periods.

Historical data shows that in 2019 and 2020, trimmed mean inflation was higher than core PCE, which might have prompted the Fed to adopt a more hawkish policy stance. Bhave stated, "To preserve the Fed's credibility and avoid the perception of selectively using data, Warsh will need to stick with his preferred metrics even when they read higher than core inflation."

On June 16-17, Warsh will chair his first Federal Open Market Committee (FOMC) meeting as Chair. Against a complex backdrop of rising inflation, unprecedented divisions within the FOMC, and ongoing White House pressure for rate cuts, this meeting will not only be the first test of Warsh's leadership but could also become a key juncture determining the Fed's policy direction for years to come.