Will Trump respect the Fed’s independence?
Summary
A little jawboning won’t hurt, but firing Powell or designating a ‘shadow chairman’ would.When I joined the Federal Reserve Board as vice chairman in 1994, the central bank was already the center of the universe for financial-market specialists. To the general public, however, it was an obscure government agency that did . . . what? One of my colleagues joked that most Americans thought the Federal Reserve was a national forest.
No longer. The Fed is often the focus of national attention, as it was recently when it announced that it expected to cut interest rates only another 50 basis points in 2025. This issue—how many rate cuts the Fed will pursue and when—matters a great deal to bond traders. Yet in the scheme of things, it’s minor compared with an issue the nation is likely to face once Donald Trump returns to the White House: the independence of the Fed.
This is déjà vu all over again. During Mr. Trump’s first term, he frequently lambasted the Federal Open Market Committee, and Chairman Jerome Powell personally, for not cutting rates fast enough. Now the FOMC seems almost certain to pause its rate cutting at its Jan. 29 meeting. Whether it resumes cuts on March 19 is in question. If it doesn’t, will Mr. Trump hold his temper?
It would doubtless be in the country’s best interest if he did. Several centuries’ worth of evidence showed that political control of monetary policy often led to high inflation, whether from monarchs clipping the currency or governments running the printing presses. More recent statistical evidence, between the 1960s and 1980s, showed that more independent central banks generally produced lower inflation without slower growth. Seeing that technocrats executed monetary policy better than politicians, many nations made their central banks independent.
The Fed gained real independence from the White House in the Treasury-Fed Accord of 1951. It lost it for a brief while in the early 1970s, when Chairman Arthur Burns allowed Richard Nixon to bully it, contributing to a bout of inflation. The iron-willed Paul Volcker firmly re-established the central bank’s independence thereafter, and it has rarely been questioned since.
That is, until Mr. Trump’s first term. As president, he threatened for months to fire Mr. Powell but backed off when told he lacked the legal authority. Will he follow that same legal advice this time around? Will he even get it from Attorney General-designate Pam Bondi?
Suppose Mr. Trump decides not to try to fire Mr. Powell, as Scott Bessent, his nominee for Treasury secretary, has suggested. There are still many things the president can do to undermine the chairman and the Fed’s independence.
Most obviously, the president gets to fill vacancies on the Federal Reserve Board as they arise. If Mr. Trump can hold his fire for a year, the term of Fed Gov. Adriana Kugler will expire in January 2026. Ms. Kugler is a fine governor who leans dovish, so Mr. Trump may reappoint her. He should. But he is also perfectly within his rights to send the Senate another name.
What he does in January 2026 will send an important signal about May 2026, when Mr. Powell’s four-year term as chairman expires. Replacing him with someone more to Mr. Trump’s liking is also entirely within the president’s authority, so long as the Senate confirms the nominee. Hold your breath. A MAGA sycophant at the helm of the Fed is a frightening thought.
Speaking of nightmares: Mr. Trump may not wait for a peaceful transition. During his first term, the White House broached the idea of demoting Mr. Powell to an ordinary member of the Federal Reserve Board. This step, too, is probably illegal, so the incoming administration is considering another scenario: Mr. Trump could designate, or even nominate, Mr. Powell’s successor well before his term ends, thereby creating, in Mr. Bessent’s words, a “shadow" Fed chairman.
Imagine the dynamic: Every time Mr. Powell offered forward guidance about what the FOMC might do, or even opined on the state of the economy, the nominee waiting in the wings could take to the media to contradict him. How much Fed independence would that leave?
Perhaps the least-bad option we can hope for is that Mr. Trump resumes jawboning the Fed to lower interest rates. That’s uncomfortable for the Fed but not threatening. During Mr. Trump’s first term the FOMC basically ignored his exhortations.
Letting nonpolitical technocrats run monetary policy has been good for the White House and the Fed. A little jawboning, even if nasty and gratuitous, probably won’t hurt much. Cross your fingers.
Mr. Blinder is a professor of economics and public affairs at Princeton. He served as vice chairman of the Federal Reserve, 1994-96.
