Current and former policymakers are warning that any attempt by Donald Trump to undermine the independence of the Federal Reserve in his second term as US president would destabilise the world’s largest economy and global financial markets.
In his first presidency, Trump turned on Jay Powell, who he nominated in 2017 to lead the US central bank, branding the chair “clueless” and an “enemy” for resisting his calls for lower interest rates. He toyed with firing or demoting Powell but faced resistance from his advisers given the legal limits on such a move.
Those threats resurfaced on the campaign trail as Trump mused that he wanted 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 put in comments as to whether or not the interest rates should go up or down,” the former president said at The Economic Club of Chicago last month.
Pierre-Olivier Gourinchas, the top economist at the IMF, told the Financial Times that “central bank independence is one of the great accomplishments that we’ve had over the last 50 years”.
“Anything that would go in the direction of reducing the inflation-fighting credibility of a central bank is potentially a problem.”
Trump will take up residence in the White House at a time when the Fed is debating how quickly to lower interest rates to a level that no longer crimps growth but also keeps price pressures in check.
That will require a careful balancing act, which Powell alluded to on Thursday after the Federal Open Market Committee voted to cut interest rates by a quarter-point. There is the opportunity for tension if the Fed does not lower rates as fast as Trump would like.
Powell did not rule out having to raise rates again if economic conditions worsen — a warning shot to the president-elect given fears that his plans to enact sweeping tariffs, deport immigrants en masse and lower taxes could reignite price pressures.
Political interference in an environment of resurgent inflation would be a “disaster 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 top ranks of the board of governors. His reach may be limited, though, given most of the sitting officials’ terms do not expire until long after Trump’s second presidency ends.
Powell’s term as chair ends in May 2026. On Thursday, he answered a blunt “No” when asked if he would resign from his post early if the president-elect asked him to. His governorship will not expire until January 2028, giving him scope to stay on for longer if desired. The only other vacancy that will come up is one filled by Adriana Kugler, whose term ends in January 2026.
Whoever Trump selects for those positions will need congressional approval. This is one of the safeguards enshrined in law that have allowed the institution to remain “very durable”, said James Bullard, who left his post as president of the St Louis Fed last summer to become dean of Purdue University’s business school.
But given the expansive majority of Republicans in the Senate, whose powerful banking committee spearheads the vetting process, more unconventional picks could face less pushback than in the past. That committee was crucial in halting some of Trump’s Fed picks in his first term, such as Judy Shelton.
“The Fed has managed to keep that creeping partisanship outside the building, but Trump can be a force of nature,” said Sarah Binder, political science professor at George Washington University. “The danger is that those attitudes towards the Fed spread.”
Unorthodox proposals have already been floated by Trump’s advisers, including establishing a “shadow” chair, who is widely recognised as Powell’s successor long before he is due to step down. If this person were to sit outside the Fed or occupy Kugler’s seat once she departs and signal potentially divergent guidance on monetary policy, that could lead to muddied communications.
“The Fed puts a premium on communications because in order to attain its goals, the committee wants to align financial conditions with what is going to get those goals achieved,” said Jonathan Pingle, who is the chief US economist at UBS.
“If communications prevent the markets from correctly aligning with the committee’s determination of what financial conditions are needed, then you are going to have suboptimal monetary policy.”
The most extreme threat is that Trump will seek to fire Powell, something the chair said on Thursday was “not permitted under the law”.
The Federal Reserve Act stipulates that members of the board of governors can only be removed “for cause”, which is interpreted as serious misconduct and other violations.
But the statute does not specify whether that protection extends to the chair, which Binder said could potentially be exploited in a legal challenge. In any case, Powell could stay on as governor and would likely still lead the rate-setting FOMC, whose chair is selected by its members.
Trump has hinted that he intends to keep Powell in his role, but as recently as this past summer added that this would depend on the chair “doing the right thing”.
Any indication that Trump had changed his mind on that front would likely be met with swift financial fallout, warned Mark Spindel, an investment manager who co-wrote a history of Fed independence with Binder.
“There is another governor in the room, which is the market,” he said.
If Trump sticks to his approach as a “freewheeling spender and borrower”, Spindel said “the market dynamics are really crucial”.
“You meddle with the Fed chair at your peril,” added Raghuram Rajan, a former governor of the Reserve Bank of India.