Current and former policymakers say any attempt by President Donald Trump to undermine the Federal Reserve’s independence during his second term could destabilize the world’s largest economy and global financial markets. I am warning you that you will be forced to do so.
In his first term as president, Trump criticized Jay Powell, whom he appointed to head the US central bank in 2017, branding him “ignorant” and an “enemy” for resisting calls to lower interest rates. He also considered firing or demoting Powell, but faced resistance from his advisers, given the legal restrictions on such a move.
Those threats resurfaced during the campaign, as President Trump wanted a more direct say in monetary policy decisions.
“I don’t think I should be allowed to dictate, but I do think I have the right to comment on whether interest rates should go up or go down,” the former president said at the Chicago Economic Club. last month.
Pierre-Olivier Grinchat, the IMF’s top economist, told the Financial Times: “Central bank independence is one of the great achievements of the last 50 years.”
“Anything that goes towards undermining the credibility of central banks in fighting inflation is potentially problematic.”
President Trump will enter the White House at a time when the Fed is debating how quickly to lower interest rates to a level that no longer stifles growth and limits price pressures.
That will require a careful balancing act, which Chairman Powell hinted at Thursday after the Federal Open Market Committee voted to cut interest rates by a quarter of a percentage point. Tensions could escalate if the Fed doesn’t cut rates as quickly as President Trump wants.
Powell did not rule out the need to raise rates again if economic conditions worsen. The move was a warning to the next president amid concerns that plans to impose significant tariffs, expel immigrants and cut taxes could reignite price pressures.
Brown University economist Shebnem Karemli-Ozcan said political intervention in an environment of resurgent inflation would be a “disaster scenario.”
Beyond the verbal attacks that Powell has so far rejected, Trump will also have some leeway to reshape the board’s top ranks. But his reach may be limited, given that most incumbent officials’ terms do not expire until long after Trump’s second presidential term ends.
Chairman Powell’s term ends in May 2026. Asked on Thursday if he would resign early if asked by the next president, he said a flatly “no.” The governor’s term does not expire until January 2028, so he could stay in office longer if he wishes. The only other vacancy is the one filled by Adrianna Kugler, whose term ends in January 2026.
Whoever President Trump chooses for these positions will need approval from Congress. James Bullard, who left his post as president of the St. Louis Fed last summer to become dean of Purdue University’s business school, said this allows the institution to remain “very durable.” He said this is one of the safety measures required by law.
But given the Republican supermajority in the Senate and the party’s powerful Banking Committee spearheading the vetting process, more unconventional nominations could face more backlash than in the past. may be lower. The Senate was crucial in blocking some of Trump’s Fed picks during his first term, such as Judy Shelton*.
“While the Fed has been successful in keeping creeping partisanship out of the building, Mr. Trump can be a force of nature,” said Sarah Binder, a political science professor at George Washington University. “The danger is that this attitude toward the Fed will spread.”
Trump’s advisers have already floated unconventional proposals, including creating a “shadow” chairman who was widely seen as Mr. Powell’s successor long before he left office. Communication could be disrupted if this person were to sit outside the Fed, or to take Mr. Coogler’s seat after he leaves, suggesting potentially different guidance on monetary policy.
Jonathan Pingle, chief U.S. economist at UBS, said: “The Fed values communication because the committee wants to align financial conditions to achieve its goals.” said.
“If communication fails to properly align the market with the Committee’s decisions about what financial conditions are needed, suboptimal monetary policy will result.”
The most extreme threat is for President Trump to call for Powell’s removal, which the chairman said Thursday was “not permissible under the law.”
The Federal Reserve Act states that board members can be removed only for “just cause,” which is interpreted as gross misconduct or other violations.
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But the law does not specify whether that protection extends to the chair, and Binder said it could be used to mount a legal challenge. In any case, Mr. Powell is likely to remain president and continue to lead the FOMC, which sets interest rates and whose chair is elected by its members.
President Trump has hinted that he intends to keep Powell in office, but added as recently as summer that it depends on the chairman “doing the right thing.”
Mark Spindell, an investment manager who co-authored a history of the Fed’s independence with Binder, warned that any sign that Trump has changed his mind on this point would likely result in rapid economic repercussions. did.
“There is another governor in the room called the market,” he said.
Spindel said that if President Trump were to stick with his “free-spirited spender-borrower” approach, “market trends are very important.”
Former Reserve Bank of India Governor Raghuram Rajan added: “We are interfering with the Fed chairman at our peril.”
*This article has been corrected to reflect that the Senate, not the Banking Committee, voted against accelerating Judy Shelton’s appointment.
