Trump Goes to War with the Fed
AFP/APP
Washington: Donald Trump’s simmering discontent with the US Federal Reserve boiled over this week, as the president threatened to take the unprecedented step of ousting the head of the fiercely independent central bank.
Trump has repeatedly expressed a desire for rate cuts to stimulate economic growth amid his tariff plans and has threatened to fire Fed Chair Jerome Powell if he does not comply. This puts the central bank and the White House on a collision course, one that analysts warn could destabilize US financial markets.
“If I want him out, he’ll be out of there real fast, believe me,” Trump said Thursday, referring to Powell, whose second four-year term as Fed chair ends in May 2026. Powell has said he has no plans to step down early, emphasizing that the bank’s independence over monetary policy is a “matter of law.”
“Clearly, the fact that the Fed chairman feels that he has to address it means that they are serious,” KPMG chief economist Diane Swonk told AFP, referring to the White House. Stephanie Roth, chief economist at Wolfe Research, said she believes “they will come into conflict,” but does not think “that the Fed is going to succumb to the political pressure.”
Most economists agree that the administration’s tariff plans — which include a 10 percent “baseline” rate on imports from most countries — will likely put upward pressure on prices and slow economic growth, at least in the short term. This would keep inflation well away from the Fed’s long-term target of two percent, making it unlikely for policymakers to cut rates in the coming months.
“They’re not going to react because Trump posted that they should be cutting,” Roth said in an interview, adding that doing so would be “a recipe for a disaster” for the US economy.
Fed Independence ‘Absolutely Critical’
Many legal scholars argue that the US president does not have the power to fire the Fed chair or any of the members of its 19-person rate-setting committee for any reason other than cause. The Federal Reserve system, created over a century ago, is designed to insulate the US central bank from political interference.
“Independence is absolutely critical for the Fed,” said Roth. “Countries that do not have independent central banks have currencies that are notably weaker and interest rates that are notably higher.”
Moody’s Analytics chief economist Mark Zandi told AFP that “we’ve had strong evidence that impairing central bank independence is a really bad idea.”
‘Can’t Control the Bond Market’
A serious threat to the Fed’s independence comes from an ongoing case in which the Trump administration has indicated it will challenge a 1935 Supreme Court decision that denies the president the right to fire heads of independent government agencies.
This case could have significant ramifications for the Fed, given its status as an independent agency whose leadership believes they cannot currently be fired by the president for any reason but cause.
However, even if the Trump administration succeeds in court, it could soon run into the ultimate guardrail of Fed independence: the bond markets.
During recent market turbulence triggered by Trump’s tariff plans, US government bond yields surged, and the dollar fell, signaling that investors might not see the United States as the safe haven it once was. Faced with the sharp rise in US Treasury yields, the Trump administration paused its plans for higher tariffs against multiple countries, helping to calm the financial markets.
“If investors believed the Fed’s independence to tackle inflation was compromised, that would likely push up yields on long-dated government bonds, anticipating higher long-term inflation, and put pressure on the administration,” Swonk explained.
“You can’t control the bond market. And that’s the moral of the story,” she added. “And that’s why you want an independent Fed.”
