Powell versus Trump: Why Fed independence matters in times of turmoil

At a time of rising concern about Fed independence, he did us all a favour by showing he’s laser-focused on the US central bank’s core goals and will fight to be able to keep it that way. Predictably, Trump immediately proved this point again on Thursday. In a post on Truth Social, he said the Fed should have cut interest rates already and “Powell’s termination cannot come fast enough!"

Also Read: The US Fed should inject itself with a good dose of humility

Let’s start with Powell’s defence of Fed independence. “Our independence is a matter of law," Powell said at the Economic Club of Chicago, clearly rebutting a president who has routinely tried to bully the central bank on social media and has already been testing the independence of other agencies.

Supreme Court Chief Justice John Roberts has allowed Trump to go ahead with the firing of top officials at other agencies—a case that some see as teeing up a more market-sensitive battle over whether Trump can fire or demote Powell. He said he didn’t think that case would apply to the Fed and that he’d never bow to outside forces.

“We’re never going to be influenced by any political pressure," Powell said. “People can say whatever they want, that’s fine. That’s not a problem. But we will do what we do strictly without consideration of political or any other extraneous factors."

In his conversation with former Reserve Bank of India Governor Raghuram Rajan, Powell kept his cool and refrained from calling out Trump by name. But his bluntness was an unmistakable departure for the central banker who has essentially avoided commenting on White House policy and turned the other cheek when attacked by Trump in public. 

His remarks come at a time when concerns about the Fed’s independence are starting to spill over subtly into the market discourse. They also come as Trump’s trade policies threaten to put the central bank in an impossible position—essentially trying to simultaneously contain risks to its stable prices and labour market mandates.

Powell didn’t mince words about the ever-changing tariff plans, which could yet push US duties on imports to the highest in a century—depending on which day of the week you decide to run the numbers. 

Businesses and investors could pull back if clarity about the future isn’t restored, he said. “If the United States were to become a jurisdiction where risks are just structurally higher going forward, that would make us less attractive as a jurisdiction," he said. “We don’t know that at this point, but I think that would be the effect." At another point, he worried that cuts to scientific research may have “implications for economic growth, for productivity, for health, for all kinds of things."

Also Read: Barry Eichengreen: Trump is taking aim at the IMF, World Bank and US Fed

Powell was clear about the bind that tariffs put the Fed in. “The effects of [the policy] are likely to move us away from our goals," he said. “Unemployment is likely to go up as the economy slows in all likelihood, and inflation is likely to go up as tariffs find their way and some part of those tariffs come to be paid by the public. So that’s the strong likelihood." The Fed’s “obligation" was to keep longer-term price expectations anchored, he said. Economists tend to believe that inflation expectations are a self-fulfilling prophecy.

Powell also relaxed his usual commitment to avoid comments on fiscal policy and issued what amounted to blatant criticism of the Department of Government Efficiency, Trump donor Elon Musk’s signature cost-cutting initiative, which has ended up being as much a tool for culture wars and addressing partisan grievances as a streamlining of the budget.

As Powell correctly noted, Social Security, Medicare and Medicaid make up an overwhelming and growing part of the budgetary pie, and it’s only by reforming entitlements that any government can achieve meaningful progress on spending. “When people are focusing on cutting domestic spending, they’re not actually working on the problem," Powell said. “Domestic discretionary spending is already going down [as a percentage of federal spending]. I like to make that point because so much of the dialogue that the politicians offer is about domestic discretionary spending, which is not the issue."

Also Read: Mint Quick Edit | Trump versus Powell on US Fed policy

At the end of the day, I suspect that Powell’s chutzpah will prove an asset for the economy and markets at a time of tremendous policymaking turbulence. That was a little hard to appreciate on Wednesday when Powell’s remarks seemed to deepen losses on the S&P 500 Index, with some traders focusing on his cautious attitude toward cutting rates to counter tightening financial conditions.

In the medium run, investors need to know that America’s central bank remains committed to its goals of maximum employment and stable prices, even if it needs to fight for its ability to carry out its work. Market volatility fits into neither of those buckets so far. 

The author is a Bloomberg columnist.