Trump versus the Fed

Trump has been annoyed with the Federal Reserve bank for a long time as he would like them to lower interest rates to get the U.S. economy moving at a faster pace. The Fed, on the other hand, states that the inflation is still too high and that there are too many uncertainties related to tariffs to justify a lowering of the interest rates. Last the tension escalated as Trump posted a letter saying he had fired Lisa Cook, a Fed governor, for alleged mortgage fraud. It is not clear that he has the authority to fire a Fed governor as it is supposed to be independent. It is sad to see that another democrat is involved in criminal activities, but that saga will play out in the courts.

The Fed already has a tarnished reputation from the pandemic, when they were unreasonably slow to react and inflation reached record heights. Maybe they are slow to act now as well, but it certainly feels like there are many challenges to the economy. Just as Fed policymakers weigh the balance of risks to the economy, and the many potential scenarios that may unfold, they similarly weigh the balance of political risks to their mandate and autonomy.

This is why they have tried to hold off, for as long as possible, a direct confrontation with Trump. And it’s why even now, as Trump makes his most aggressive move yet to challenge the Fed’s political independence, the institution’s response is firm but not furious. The heightened awareness among central bankers, not just here in the U.S., but also abroad, of Trump’s attacks on the Fed, and the potential ripple effects for the global economy, was palpable at the Fed conference in Jackson Hole late last week.

The notion that monetary policy should be determined by interpretations of data, rather than what politicians say, is deeply baked into central bankers’ DNA. The decision to signal it will not automatically bend to Trump’s decree shows that the Fed is aware that the battle does not end here. Trump has spent years across his first and second terms blasting Powell over interest rates while stopping short of formally moving against the central bank. Powell, in turn, has spent those same years mostly ignoring Trump’s criticisms.

Fed board members can only be removed “for cause,” a murky legal phrasing that has not been litigated but implies that there must be some sort of wrongdoing. Cook argues that Trump has no grounds to fire her, but we have also not received any formal rebuttal of the allegations from her yet. In response, the Fed is treading carefully. In effect, Powell and his fellow officials are deferring the decision on whether to treat Cook as an ex-member of the board, pending advisement from a court.

For years, Trump has harangued the country’s central bankers, calling Jerome Powell, whom Trump himself appointed as Fed chair, a “stupid person,” and arguing that the Fed’s governors should be ashamed for holding interest rates where they are. But most experts agree that borrowing costs are sitting at an appropriate-enough level: The economy is growing, and inflation is ticking up slightly due to the White House’s trade policy. Virtually nobody except for Trump thinks the federal funds rate should be one percent, a rate suited for markets in panic and an economy in recession. More important, the White House is not supposed to have any direct control over monetary policy. The president can name appointees to the Fed and fire them for cause, but that is it. The fact that the Fed operates without political influence is one reason the American economy is as strong as it is.

Why aren’t the markets moving by the Trump versus the Fed drama? Perhaps because the course of interest-rate policy and the Fed’s independent status are not immediately changing. Trump has been threatening Fed officials since his first term. If the White House manages to install lackeys at the Fed and push interest rates lower, Washington risks creating bubbles and allowing inflation to get out of control, with American consumers footing the bill. And if investors lose confidence in the quality of Fed officials and the independence of the central bank, interest rates will rise. The economy will be more sluggish. Ultimately, foreign investors might elect to invest in Europe or Japan rather than the United States, eroding the dollar’s primacy.

In order for Trump to get the Fed to follow his MAGA vision, he would have to get a majority in the Fed board. That will not happen easily. After all, the seven Fed board of governors are appointed for 14 years. The Federal Open Market Committee (FOMC), the main monetary policymaking body setting the interest rate, has 12 voting members, which includes the seven governors and the president of the Federal Reserve Bank of New York, plus four rotating Reserve Bank presidents of the remaining 11 regional banks. Trump will likely not back down, but it seems to be reasonable that the Fed should remain independent and focus on economic data to set the interest rates. In the current environment, Trump wants the lowest possible interest rate for political reasons, but the Fed will continue to be cautious given the ongoing uncertainties with inflation and tariffs. The battle will likely continue.