Current and former policymakers warn that any attempt by Donald Trump to undermine the independence of the Federal Reserve during his second term as U.S. president would destabilize the world’s largest economy and global financial markets.
In his first presidency, Trump turned against Jay Powellwhom he appointed in 2017 to head the US central bank, calling him “clueless” and an “enemy” for resisting his calls for lower interest rates. He considered firing or demoting Powell, but faced resistance from his advisers given the legal limits of such a move.
These threats resurfaced during the electoral campaign when Asset thought he wanted to have a more direct say in monetary policy decisions.
“I don’t think I should be allowed to order it, but I think I have the right to comment on raising or lowering interest rates,” the former president told the Economic Club of Chicago. last month.
Pierre-Olivier Gourinchas, the IMF’s chief economist, told the Financial Times that “central bank independence is one of the great achievements we have made over the last 50 years.”
“Anything that could go in the direction of reducing the credibility of a central bank in fighting inflation is potentially a problem.”
Trump will move into the White House at a time when the Fed The European Union is debating how quickly it will be necessary to lower interest rates to a level that no longer hinders growth but also allows price pressures to be controlled.
That will require a careful balancing act, which Powell alluded to Thursday after the Federal Open Market Committee meeting. vote reduce interest rates by a quarter of a point. Tensions could arise if the Fed does not cut rates as quickly as Trump would like.
Powell did not rule out having to raise rates again if economic conditions deteriorate – a warning shot to the president-elect given fears that his plans to adopt drastic tariffs, mass expulsions of immigrants and reduce taxes cannot revive pressure on prices.
Political interference in an environment of resurgent inflation would be a “worst case scenario,” said Şebnem Kalemli-Özcan, an economist at Brown University.
Beyond verbal attacks, which Powell has rebuffed in the past, Trump will also have some leeway to reshape the highest echelons of the board of governors. Its reach may be limited, however, given that most sitting officials’ terms do not expire until long after the end of Trump’s second presidency.
Powell’s term as president ends in May 2026. On Thursday, he answered emphatically “no” when asked if he would resign his post sooner if asked to do so by the president-elect. His term as governor will not expire until January 2028, allowing him to stay longer if he wishes. The only other vacancy to be filled is the one filled by Adriana Kugler, whose term ends in January 2026.
Whomever Trump selects for these positions will need Congressional approval. It’s one of the safeguards enshrined in the law that has allowed the institution to remain “very durable,” said James Bullard, who left his post as president of the St. Louis Fed last summer. last to become dean of Purdue University’s business school.
But given Republicans’ large majority in the Senate, whose powerful banking committee leads the selection process, more unconventional choices may face less resistance than in the past. This committee played a crucial role in stopping some of Trump’s Fed picks in his first term, like Judy Shelton.
“The Fed has managed to keep this rampant partisanship out of the building, but Trump can be a force of nature,” said Sarah Binder, a political science professor at George Washington University. “The danger is that these attitudes toward the Fed will spread.”
Unorthodox proposals have already been put forward by Trump’s advisers, including the creation of a “shadow” president, who is widely recognized as Powell’s successor long before Powell steps down. If this person were to sit outside the Fed or occupy Kugler’s seat after he leaves and signal potentially divergent monetary policy directions, it could lead to confusing communications.
“The Fed places a high emphasis on communication because to achieve its goals, the committee wants to align financial conditions with what will achieve those goals,” said Jonathan Pingle, chief U.S. economist at the Fed. UBS.
“If communications prevent markets from properly aligning with the committee’s determination of necessary financial conditions, then you will end up with suboptimal monetary policy.”
The most extreme threat is that Trump seeks to fire Powell, which the president said Thursday was “not permitted by law.”
The Federal Reserve Act states that members of the board of governors can only be removed “for cause,” which is interpreted as gross misconduct and other violations.
But the law doesn’t specify whether that protection extends to the chair, which Binder said could potentially be exploited in a legal challenge. In any case, Powell could remain governor and would likely still lead the rate-setting FOMC, whose chair is chosen by its members.
Trump has hinted that he intends to keep Powell in his role, but as recently as last summer he added that it would be up to the president. »do the right thing“.
Any indication that Trump has changed his mind on this front would likely have rapid financial fallout, warned Mark Spindel, an investment manager who co-wrote a history of Fed independence with Binder.
“There’s another governor in the room, that’s the deal,” he said.
If Trump sticks to his “freewheeling spender and borrower” approach, Spindel said “market dynamics are really crucial.”
“You meddle with the Fed presidency at your peril,” added Raghuram Rajan, former governor of the Reserve Bank of India.
