The relationship between President Donald Trump and Federal Reserve Chair Jerome Powell has reached a new low, with the president threatening legal action against the central bank chief while keeping the option of firing him on the table—despite Powell's term ending in just five months.

Speaking at a news conference at Mar-a-Lago on Monday alongside Israeli Prime Minister Benjamin Netanyahu, Trump launched his most pointed attack yet on Powell, accusing him of "gross incompetence" and threatening a "major lawsuit."

The Renovation Controversy

The president's latest grievance centers on the Federal Reserve's headquarters renovation project in Washington, D.C. The building overhaul, which began before the pandemic, has seen its costs balloon dramatically—from an initial estimate of $1.9 billion to over $3.1 billion, according to Federal Reserve officials.

Trump claimed the costs have risen even higher. "The renovation of that building has gotten out of control," Trump said. "It's north of $4 billion now—about $1.5 billion more than projected."

The Federal Reserve has attributed the cost increases to post-pandemic inflation in construction materials, including steel and cement. But Trump rejected that explanation, framing it as evidence of Powell's poor management.

"We're going to probably bring a lawsuit against him," Trump declared, though he did not specify the legal grounds for such action or when it might be filed.

'Maybe I Still Might' Fire Him

The lawsuit threat came alongside renewed speculation about Powell's job security. When asked directly whether he would fire Powell, Trump responded: "Maybe I still might."

The comment represents an escalation from Trump's previous statements, which had generally acknowledged that Powell would likely serve out his term. Powell's four-year appointment as Fed Chair expires in May 2026.

"He should resign," Trump said. "It would be a favor to the nation." He added that it was "pretty close" to the end of Powell's term anyway.

Legal and Constitutional Questions

Whether a president can actually fire a Federal Reserve Chair remains a contested legal question. The Federal Reserve Act allows removal "for cause," which has traditionally been interpreted to mean serious misconduct rather than policy disagreements.

No president has ever attempted to remove a Fed Chair mid-term, and any such move would likely trigger immediate legal challenges. Bank of America CEO Brian Moynihan warned earlier this week that "the market will punish people if we don't have an independent Fed," reflecting Wall Street's anxiety about political interference with monetary policy.

The Fed Chair Succession

Despite the combative rhetoric, Trump appeared to be looking ahead to naming Powell's successor. When asked if he has a preferred candidate, the president confirmed he does, though he declined to name them.

"I do, still do—hasn't changed," Trump said. "I'll announce him at the right time." He indicated the announcement would come sometime in January.

The leading candidates for the position are widely believed to include National Economic Council Director Kevin Hassett and former Fed Governor Kevin Warsh. Both have signaled openness to a more accommodative monetary policy stance, aligning with Trump's consistent push for lower interest rates.

Market Implications

The president's comments come at a sensitive time for markets. The Federal Reserve just completed its third consecutive rate cut at its December meeting, bringing the federal funds rate to a target range of 3.5-3.75%. But Fed officials signaled a slower pace of cuts ahead, projecting just one additional reduction in 2026.

Treasury yields remained relatively stable following Trump's comments, suggesting markets are treating the threats as political theater rather than imminent policy changes. The 10-year Treasury yield dipped slightly to 4.108%, while the 2-year yield fell to 3.457%.

Still, the uncertainty is weighing on investor sentiment. The prospect of a drawn-out battle over Fed independence—combined with questions about who will lead the central bank starting next summer—adds another variable to an already complex economic outlook.

Powell's Remaining Agenda

Powell has three Federal Open Market Committee meetings left before his term expires: January, March, and May 2026. During this period, he will navigate the Fed's response to an economy that his own institution describes as "expanding at a moderate pace" while inflation "remains somewhat elevated."

The Fed Chair has maintained a stoic public demeanor in the face of Trump's criticism. At his December press conference, Powell emphasized that he is "well positioned to wait and see how the economy evolves" before making further policy adjustments.

The Bottom Line

Trump's threats against Powell are unlikely to result in immediate action, but they underscore the unprecedented tension between the White House and the Federal Reserve. With Powell's term winding down and a new Fed Chair nomination looming, the central bank's future direction—and its independence—will be among the most consequential economic storylines of 2026.

For now, markets appear to be betting that Powell will finish his term without further drama. But in the Trump era, as investors have learned repeatedly, nothing is certain until it's not.