The Federal Reserve has entered its second Trump era much as it ended the first: proceeding with its own agenda despite former President Donald Trump’s insistence on lowering interest rates. As expected, Trump did not take the decision well.
Just hours after the Fed announced on Wednesday that it would hold rates steady, Trump, who initially appointed Fed Chair Jerome Powell, took to Truth Social to criticize Powell and his colleagues, accusing them of failing “to stop the problem they created with Inflation.”
While Trump has not explicitly stated whether he intends to fire Powell or attempt to exert direct control over interest rate decisions—both of which Powell has said are illegal—this latest dispute between the former president and the Fed raises the possibility that the central bank could face a fundamental shake-up.
A Renewed Feud
The Fed’s decision not to lower rates follows a series of cuts amounting to a full percentage point over its prior three meetings last year, just before Trump assumed office.
Throughout his campaign and since taking office, Trump has repeatedly advocated for lower interest rates, even declaring at the World Economic Forum’s annual meeting last week that he would “demand that interest rates drop immediately.”
Lower interest rates can drive up stock prices and make borrowing more affordable, often boosting a president’s approval ratings. However, they can also contribute to rising inflation.
During a press conference following the Fed’s rate announcement, Powell refrained from directly addressing Trump’s comments.
“I am not going to have any response or comment whatsoever on what the president said,” Powell told reporters. “It is not appropriate for me to do so.” He also reassured the public that the Fed remains committed to its mandate.
“The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals and really keeping our heads down and doing our work, and that’s how we best serve the public,” Powell added.
Powell, who has led the Fed since 2018, has repeatedly emphasized that, as an independent government agency, the Fed does not answer to the president or any other elected official.
Furthermore, when asked in November whether Trump could remove or demote him or other Fed board members, Powell responded bluntly: “Not permitted under the law.”
The Fed’s Independence at Stake
“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” Powell stated in a speech two years ago. “But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”
In 2022, Powell primarily faced criticism from Democrats, including Sen. Elizabeth Warren of Massachusetts, who accused him of jeopardizing jobs in his fight against inflation. At the time, the Fed had been aggressively raising rates to combat inflation, which had hit a 40-year high. These hikes led to higher borrowing costs and a stock market downturn, though they were instrumental in bringing inflation closer to the Fed’s 2% target.
“The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors,” Powell reiterated in 2023.
Research supports the view that central banks with greater independence tend to maintain lower inflation. Ellen Meade, a Duke University economics professor and former Fed official, coauthored studies—cited by Powell and other Fed leaders—that underscore this point.
Her findings indicate that central banks with protections against political interference, such as safeguards preventing easy removal of officials, tend to achieve better economic outcomes. However, she also notes that central banks function best when they are held accountable by lawmakers and operate within clear policy mandates, like the Fed’s 2% inflation target and full employment goal.
“If efforts to undermine the Fed’s independence succeed, it would be akin to ‘removing the institution,'” Meade told.
Donald Trump and Jeremy PowellThe Dangers of Political Interference
The Fed’s status as an independent institution stems from the 1913 law that created it and the 1935 Banking Act, which restructured it to reduce political influence. However, history shows that when the Fed has caved to political pressure, the consequences have been severe.
During the 1970s, then-Fed Chair Arthur Burns maintained a close relationship with President Richard Nixon. Facing reelection and economic warning signs, Nixon discouraged Burns from raising rates, fearing it would hurt his campaign. Burns complied, and the resulting lack of intervention contributed to the “Great Inflation,” a period of prolonged and severe inflation.
It wasn’t until Paul Volcker became Fed Chair that inflation was decisively tackled. Volcker prioritized economic data over political demands, a principle that has guided the Fed’s decision-making ever since.
Recognizing past failures, Congress amended the Federal Reserve Act in 1977, requiring the Fed Chair to testify before Congress twice a year, reinforcing transparency. The 1935 Banking Act had already helped insulate the Fed from partisan influence by formalizing its policy committee structure.
“The assumption that law is the exclusive source of Fed independence is wrong,” said Peter Conti-Brown, a financial regulation scholar, in a Yale Journal on Regulation study. “But the opposite assumption, that law is irrelevant, is also incorrect.”
Could Trump Challenge the Fed’s Autonomy?
The 1935 Banking Act states that the president may remove Fed board members “for cause,” a term generally understood to mean something beyond mere policy disagreements. However, legal experts argue that this restriction could be challenged.
A 1935 Supreme Court ruling, Humphrey’s Executor v. United States, limited the president’s power to remove independent agency officials. The case involved an FTC commissioner dismissed by President Franklin Roosevelt over policy disagreements. The Court ruled that the Constitution does not grant the president unlimited removal authority.
However, recent legal developments may provide Trump with an opening to challenge this precedent. In Trump v. United States (2024), the Supreme Court recognized an unrestricted power of removal as a core presidential authority. Additionally, in Seila Law LLC v. Consumer Financial Protection Bureau, the Court ruled that a president could remove a CFPB director without cause, though it carved out a special historical exception for the Fed.
“There’s a very good precedent for the Federal Reserve, in particular, being independent,” said Christine Chabot, a law professor at Marquette University. “But someone could argue that the historical precedent for unrestricted presidential removals should apply instead.”
Economic considerations would also weigh heavily in any legal battle over the Fed’s independence. If the Fed were compromised, Treasury yields could spike, leading to higher borrowing costs and increased inflation expectations, Meade warned.
Trump’s Push for More Influence
On the campaign trail, Trump has suggested that the president should have a say in interest rate decisions.
“I feel the president should have at least a say in there. I feel that strongly,” Trump said. “I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve—or the chairman.”
Following backlash, he softened his stance, saying he merely wanted the ability to discuss rates.
Legal experts suggest that requiring the Fed Chair to meet with the president and explain decisions would be an easier challenge to win than outright removal. The Constitution grants the president the right to request written opinions from executive officials, which could be extended to Fed policy discussions.
Whether Trump pursues direct control over the Fed or merely seeks more influence remains to be seen. But one thing is certain: the battle over the central bank’s independence is far from over.
