Trump’s relentless Fed pressure creates lose-lose scenario for Powell

The assault has little modern precedent and forces the Fed to confront a dreadful choice: It could cut rates sharply as Trump demands and risk fueling inflation that damages its credibility with markets. Or it could maintain its current wait-and-see stance, and face further bullying that would weaken its standing if the economy slows sharply and the administration is validated in its view that inflation shouldn’t be a worry.

Fed Chair Jerome Powell faces Congress on Tuesday for regularly scheduled testimony on monetary policy. How lawmakers regard the attack on Powell will be a key gauge of support for Fed independence. The central bank has in recent decades operated with a measure of independence to set monetary policy free of direct political control, which Powell has worked assiduously to defend.

The stakes extend far beyond current policy debates. Powell’s term expires in less than a year. Trump could establish a template for presidential influence that reshapes the central bank, with his relentless criticism serving as both a warning to Powell’s successor and a casting call for replacements who signal they will appease him.

If future central bank leaders feel more compelled to consider political preferences alongside economic data, decades of credibility that anchor global confidence in U.S. monetary policy could be degraded.

On Friday, Trump called on Powell to reduce the central bank’s policy rate, currently around 4.3%, to between 1% and 2% to lower rising costs to service the federal debt.

Other Trump advisers, including Commerce Secretary Howard Lutnick, have amplified the president’s criticisms of monetary policy by arguing that worries about tariff-driven inflation are being exaggerated.

Since meeting with Powell privately in the Oval Office last month, Trump has unleashed a torrent of insults. “I don’t know why the Board doesn’t override this Total and Complete Moron!" said Trump in a social-media post on Friday. Trump mused about attempting to fire Powell, an idea he had previously brandished and then abandoned.

Powell has said the Fed makes its decisions based on its best analysis of the economy. “From my standpoint, it’s not complicated. What everyone [at the Fed] wants is a good, solid, American economy," he said last week.

Trump’s call for lower rates could coincide with an unusual divide inside the Fed across party lines.

Among Fed officials who have spoken since last week’s meeting, the only two to signal any appetite to cut rates at the Fed’s next meeting in late July are the two appointed by Trump in his first term. Michelle Bowman said in a speech Monday that she was more worried about risks of weaker employment than higher inflation—a meaningful shift for a policymaker who was previously highly focused on inflation worries.

Fed governor Christopher Waller, who was appointed by Trump in 2020, said in a CNBC interview on Friday that he could support a rate cut next month because he worries about allowing too much labor market weakness.

In several speeches over the past two months, former Fed governor Kevin Warsh has said the central bank is to blame for attacks on its conduct. “I read breathlessly in the newspapers how mean these politicians are to the central bank. Well, grow up! Be tough," said Warsh, a leading candidate for Fed chair, during a panel discussion last month.

Presidential pressure over Fed chairs isn’t new, but it used to happen in private. In the 1960s, President Lyndon Johnson physically intimidated his Fed chair, William McChesney Martin Jr., after summoning him to his Texas ranch; seated together on the porch, they later played down any conflict to reporters.

In the 1970s, President Richard Nixon and his advisers planted a false story in the press that then-chair Arthur Burns was seeking a pay raise while arguing for price and wage controls. Burns ultimately yielded to White House pressure.

The high inflation that followed in the 1970s was cured by punishing recessions in the early 1980s. Ever since, central bankers in the U.S. and other advanced economies have tried—and largely succeeded—in building support among the government for greater independence, arguing that it leads to better economic outcomes.

“It is normal for presidents to put pressure on the Fed chair, but Trump’s feel different. His attacks are more vicious, constant, and public," Mark Spindel, an investment manager who co-wrote a history of Fed independence, said in an interview Sunday.

Powell became Fed chair in 2018 after Trump appointed him, and the president frequently bashed Powell for being too slow to support the economy by lowering interest rates.

Trump’s critiques over the past week have been different. Republicans in Congress and Trump’s White House have found it more difficult than expected to cut spending and reduce deficits. That has led the president to demand lower interest rates to bring down growing payments on the federal debt, which this year could exceed what the U.S. spends on the military.

Worries about a central bank succumbing to such “fiscal dominance" was the core tension that led the Fed to seek greater autonomy, often referred to as its independence, from the executive branch in the early 1950s.

Cutting rates aggressively without signs of more evident economic weakness risks backfiring because long-term interest rates could go up. The Fed controls short-term interest rates but long-term rates are determined by investor demand for U.S. bonds.

Trump acknowledged Friday that “my strong criticism" of Powell “makes it more difficult for him to do what he should be doing."

Fed officials have been unnerved by the attacks. If the Fed isn’t seen as acting in the country’s best interest, it will be harder for the institution to make the at-times difficult but necessary decisions to slow the economy to control inflation.

Trump’s increasingly sharp attacks on Powell show how the president has few good options to get the monetary policy he wants without making a more persuasive argument about the risks facing the economy.

Ousting Powell looks less viable than it did a few weeks ago. The Supreme Court went out of its way to signal that the Fed was off limits when it granted Trump’s emergency request last month to fire federal commissioners in the face of a law prohibiting their arbitrary removal.

A second option would be to announce Powell’s successor unusually early, which Trump hinted at doing earlier this month. A so-called “shadow chair" would be designed to undercut Powell by getting markets to place less weight on his forward-looking statements about policy.

It could put the chair-in-waiting in an awkward spot of publicly criticizing his or her future Fed colleagues—whose support will be needed once the new chair takes office—and being judged by market participants as a presidential toady. Alternatively, the shadow chair might defend the Fed’s moves, upsetting Trump and losing the job before even taking office.

The lack of attractive options for dislodging Powell explains why a sustained pressure campaign is likely to continue. The Fed is worried about letting inflation become a problem for a second time in five years. But Trump is balancing out that institutional risk by putting officials on notice that they will be blamed if the economy takes a dive.

“Trump’s broadsides ‘work.’ That’s why he does them," said Spindel.

Write to Nick Timiraos at Nick.Timiraos@wsj.com