Can the Fed stay independent under Trump?
The US president has stepped up his criticism of the central bank’s chair, prompting some to question how long it can remain above politics
At the European Central Bank president’s annual forum last month, Christine Lagarde took a moment to lavish praise upon a central banker from outside Europe’s borders.
Jay Powell, she said, epitomised the “standard of a courageous central banker”, leading to a rousing ovation for the Federal Reserve chair, who sat at the top table with head bowed.
The tribute from the central banking elite stood in stark contrast to the treatment Powell had received just hours before from the world’s most powerful man.
US President Donald Trump had earlier posted a handwritten note on his Truth Social platform, his signature thick black Sharpie ink scrawled over a table of central bank interest rates — the Swiss with the lowest and the US in 35th place. He lambasted Powell, whom he had appointed during his first term, for not lowering rates, saying he had “cost the USA a fortune”.
The White House insists the Fed is a barrier to its efforts to boost US growth. Spokesman Kush Desai said Trump has “a First Amendment right as an American citizen and duty as our commander-in-chief . . . to voice his concerns about flawed policymaking”, which he added was “needlessly holding back the economic resurgence that this administration is trying to unleash with a full suite of supply-side reforms”.
But others believe it is more to do with federal borrowing costs in the context of rising government debt. “It’s pretty universal having a president who wants lower rates,” says Don Kohn, a former Fed vice-chair who is now at the Brookings Institution think-tank.
“What’s unprecedented is [Trump] doesn’t want lower rates to goose the economy, [for him] it’s about lowering the cost of the debt . . . That’s worrisome because keying monetary policy to relieving budget pressures is a sure track towards higher inflation.”
On Wednesday, Trump appeared to confirm this, posting on his Truth Social platform that the fed funds rate was “at least 3 points too high” and “costing the US $360bn a percentage point in refinancing costs.”
The Fed has kept borrowing costs on hold at between 4.25 and 4.5 per cent this year, even as other central banks have cut. At the ECB forum, Powell said that were it not for April’s “liberation day” tariffs and their impact on US inflation forecasts, the Fed “would probably have cut rates [again] by now”.
Frustrated by the Fed’s stance, Trump has publicly criticised its chair, variously describing Powell as “stupid”, “terrible”, a “numbskull”, “a stubborn mule” and “a total and complete moron.”
In May, Powell was summoned for the first time to the White House, to account for the Fed’s actions before the president, vice-president JD Vance, commerce secretary Howard Lutnick, Treasury secretary Scott Bessent and Kevin Hassett, chair of the National Economic Council.
Trump has also talked about firing Powell before the end of his term or, more recently, nominating his replacement — a so-called shadow chair — well before then.
At stake is the continued separation of the Federal Reserve’s monetary policy from politics, in place since 1951 and respected by most presidents and lawmakers ever since. The checks and balances intended to preserve that independence have remained largely intact — a Supreme Court opinion in May has eased fears that Powell will be fired, for instance — but they are being tested as never before.
The browbeating has alarmed investors, with the US currency falling to a three-year low after The Wall Street Journal reported that Trump could announce a shadow chair as early as the summer. The White House has denied a decision is “imminent” but at the end of June, Trump said he had a shortlist of “three or four names” to replace Powell.
Trump’s unpredictable policymaking and verbal violence are not the only challenges facing the Fed chair in his final 10 months doing the biggest job in central banking.
The president’s attacks on those he perceives as enemies, in fields such as law and academia, has helped feed a populist contempt for elites. “There’s less respect for expertise than there was in the 1990s,” says Sebastian Mallaby, a senior fellow for international economics at the Council on Foreign Relations.
Consensus about the direction of interest rates among the 12 members of the Federal Open Market Committee has also started to break down, after two recently signalled they would vote for a cut at its next rate-setting meeting.
Powell has said he plans to remain in post until his term as chair expires in May 2026, and replacing him with someone more pliable will not be straightforward.
His assiduous consensus-building among members of Congress could make the confirmation of an underqualified Trump loyalist tricky. The structure of the rate-setting Federal Open Market Committee limits the chair’s power, while some say Trump’s outspoken criticisms of Powell will deter credible candidates.
“You don’t want to be seen as the person who succumbed to political pressure. And if you thought you were going to succumb, I don’t see a person of even modest integrity accepting the job,” says Raghuram Rajan, a University of Chicago academic who also faced political pressure during his time as governor at the Reserve Bank of India.
“I would think most people would simply say, ‘Hang it, it’s not worth it.’”
Trump’s unwillingness to offer a second term to Janet Yellen, breaking an almost 40-year tradition of bipartisan support for incumbent Fed chairs, led him to nominate Powell — on the recommendation of then Treasury secretary Steven Mnuchin — for the job in November 2017.
At the time he warmed to Powell’s moderate Republicanism, pro-markets approach and private-equity background. He also respected his experience as a Fed governor and the perception that he was more open to interest rate cuts than the other leading candidates — John Taylor and Kevin Warsh, both of the hawkish Hoover Institution at Stanford University.
But Powell fell out of favour soon after taking office, as the FOMC raised rates at his first meeting in the chair and three more times during 2018. The following year, Trump questioned whether China’s president, Xi Jinping, or the Fed chair was more of a threat to America.
Since then, the president has made no secret of his contempt for the role of Fed chair. The job, he said shortly before being elected for a second time, required the holder to “just show up to the office once a month . . . flip a coin . . . and everybody talks about you like you are God”.
He has made clear that his next pick for what he describes as “the best job in government” will be based less on knowhow, and more on kowtowing to the White House.
“Whoever’s in there will lower rates,” the US president said in the Oval Office in late June. “If I think someone is going to keep rates where they are, I’m not going to put them in.”
But Fed insiders believe Trump is underestimating the challenges his nominee might face once they enter an institution with a long history of independence from government.
“The memory of the 1970s is seared into the institutional framework of the Fed,” says Diane Swonk, chief economist at KPMG US. “Even the janitor there knows who the worst Fed chair in history was,” she adds — a reference to Arthur Burns, who cut rates following pressure from Richard Nixon ahead of the 1972 presidential election, only for inflation to soar and growth to collapse after the oil price shock the following year.
His successor Paul Volcker, now regarded as one of the most effective chairs, had to raise interest rates to double digits to tame inflation, enduring public opprobrium as unemployment topped 10 per cent.
The Fed has faced periodic brickbats from presidents ever since. George HW Bush, in whose administration Powell served as a Treasury official, blamed Fed chair Alan Greenspan for his 1992 defeat to Bill Clinton, though Greenspan survived and was even reappointed for a fifth term by Bush’s son in 2004.
Powell absorbed the most important lessons of Greenspan’s long tenure: counter challenges from the executive branch and maintain good relations with Congress. “Right from the moment [Powell] became Fed chair, the number of visits to the Hill spiked up, relative to his two predecessors,” says Mallaby, the author of a Greenspan biography.
Tellingly, Trump’s attacks on the Fed have seldom been echoed by members of Congress. Republican Senator John Kennedy has even defended him publicly, saying he had “tiger blood” and was “not going to go down in history as the Federal Reserve chairman that allowed inflation to become wild as a March hare”.
Current and former officials say the fusion of monetary theory and operational independence into frameworks that target a specific level of inflation has helped the central bank appear more apolitical.
“The Fed as an institution has a much more fine-grained grip on its own policy doctrine,” says Mallaby. “There was very much a kind of flying-by-the-seat-of-your-pants, ad hoc central bank policymaking in the ’70s. That’s very, very different to where the Fed is today.”
The FOMC’s unusual organisational structure may also yet prove an effective obstacle to Powell’s successor simply carrying out Trump’s wishes. “There’s some fiction that the chair just gets his way — that’s not at all the case,” says Jon Faust, a Johns Hopkins professor who served as a special adviser to Powell.
“The chair is a powerful figure in building consensus, but no policy gets adopted without convincing the majority of the committee it’s the best thing to do.”
Sitting on that committee are seven Washington-based governors and the presidents of the 12 regional Feds — private institutions from across the US — of whom five vote on monetary policy. They are appointed by boards composed of local financiers and business leaders and can be fired only by a majority of the board governors.
John Williams of New York, Austan Goolsbee of Chicago and Alberto Musalem of St Louis — all of whom are voting FOMC members — have been far more strident than Powell in warning of the damage that Trump’s trade war will do to the US economy.
Trump’s four years in office will yield just two open seats among the governors. The first becomes available in January, offering Trump a chance to put his pick on to the FOMC ahead of Powell leaving office. The second is Powell’s own seat, at the end of January 2028, although he has not revealed whether he plans to stay on as a governor when his term as chair ends.
While governors have often not served out their full 14-year terms, insiders say many of those on the board are acutely aware of the pressure leaving early would place on the institution.
Within 48 hours of the FOMC’s June 18 meeting, Christopher Waller, a candidate to replace Powell, told CNBC that recent data on inflation was good enough to warrant a rate cut as soon as July.
By June 23, Michelle Bowman, Trump’s pick to head up banking supervision, had followed suit. The prospect of two Fed governors voting against the chair — something that last happened in 1993 — has led to unease within the institution that Trump’s blows are beginning to land.
Other FOMC members regard Powell as an effective consensus builder, suggesting a couple of votes against him would not be a killer blow. And the dissenters’ views are not far from those of the rest of the committee; a majority, including Powell, is likely to support a cut in September should inflation readings remain benign.
But if tariffs push prices up over the coming months, the FOMC may take a September cut off the table. That could increase tensions with the White House and prompt Trump to name his pick to replace Powell early.
Another possible candidate, US Treasury Secretary Scott Bessent, first mooted the idea of a shadow chair ahead of Trump’s re-election in November, telling Barron’s it would mean “no one is really going to care what Jerome Powell has to say anymore”.
The theory is that investors do not just react to what central banks do — but what they think they will do. If Trump’s nominee signals aggressive cuts once he or she is in place, investors will adjust their rate expectations from mid-2026 onwards, lowering federal borrowing costs.
It only works if the central bank’s jawboning is credible — but investors are already listening. They have responded to the shadow Fed chair rumours by pricing in more rate cuts, albeit fewer than Trump would like.
Bessent has since appeared to cool on the idea, saying in late June he did not think anyone was “necessarily talking about” the idea of a shadow Fed chair. But talk still swirls about potential candidates, who are also thought to include NEC chair Hassett and the Hoover Institution’s Warsh.
Whoever Trump picks will need to be confirmed by the Senate, where Republican control does not guarantee that a nominee will be confirmed. “We’ve seen the Senate acquiesce to Donald Trump’s desires, but there is a lot of support in Congress on both sides of the aisle for Fed independence,” says Kohn.
“A person who was perceived as just doing whatever the president wanted, and trying to get the FOMC to do whatever the president wanted, I think — maybe this is a hope — would have a very difficult time getting approved.”
Kohn adds that Trump’s calls for rapid rate cuts would also put the shadow Fed chair “in a very tricky position” once they join the FOMC. “That person needs to work with his colleagues,” says Kohn. “He needs to think about how he’s going to lead the committee.”
The FOMC could shatter convention by naming someone other than the Fed chair to lead the committee. But a likelier outcome is that Trump’s pick ends up following Powell’s playbook by ignoring demands for rate cuts once in office.
“Even if they listen to the president now, they could become much more independent once they become chair,” says Rajan. “They know history will judge them. And you don’t want to end your [career] doing miserably.”
In 1987, President Ronald Reagan nominated Greenspan to replace Volcker partly because he was expected to deliver lower rates. Instead, Swonk of KPMG US says, he proved “political, but not politically pliable”.
Powell says he wants to focus on getting inflation back to its target level of 2 per cent without destroying the jobs market. “I’m hopeful that we’ll look back on 2025 as a year when we successfully challenged some significant economic changes,” he said at the ECB forum, to more applause.
“What keeps me awake at night is, how do we get that done?”
