It seems pretty clear that President Donald Trump is not a big fan of the current Chairman of the Federal Reserve (“the Fed”), Jerome (Jay) Powell. At the root of President Trump’s problem with Mr. Powell is Powell’s reluctance to lower interest rates as quickly as the President would like. I first wrote about this issue in April 2025 when the President intimated in social media posts that Powell’s firing might be imminent. However, when financial markets reacted negatively to such an attack on the Fed’s independence, the President backed off. Unfortunately, the President could not leave good enough alone.
During this past weekend, word came out in the press that the Justice Department is investigating Powell over his testimony this past summer concerning the Fed’s building renovation project, which has experienced cost overruns. The Fed received subpoenas from the Justice Department on Friday that threaten a criminal indictment. During past attacks from the President, Mr. Powell has always attempted to avoid escalation, but not this time. In a video on Sunday night, Powell fought back. Here are two of the most striking quotes from the video:
- “This is about whether the Fed will be able to set interest rates based on evidence and economic conditions – or whether instead monetary policy will be directed by political pressure or intimidation.”
- “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”
Fortunately for President Trump, financial markets appeared to shrug all of this off in the short-term. Although market futures took a dive in response to this news on Sunday night, by the time equity markets closed on Monday, they were up marginally. It is my thought that markets recovered quickly because both Chair Powell and Fed independence may end up stronger despite the President’s attempt for the opposite. Here’s why:
- Powell’s term as Fed Chair expires this year on May 15. However, his term as a Fed Governor does not end until January 2028. Prior to this incident, Powell would have likely resigned as a Governor when his Chair term expires in May, allowing the President to appoint a new Governor (subject to Senate approval) to replace him in May. Now, it is much more likely that Mr. Powell will stick around after his Chair term expires.
- Republican Senators are not happy with this turn of events, particularly the threat to Federal Reserve independence. Senator Thom Tillis, a member of the Senate Banking Committee, which holds the hearings for prospective Fed Governors and the Chair, issued the following statement: “If there were any remaining doubt whether advisers within the Trump Administration are actively pushing to end the independence of the Federal Reserve, there should now be none. It is now the independence and credibility of the Department of Justice that are in question. I will oppose the confirmation of any nominee for the Fed—including the upcoming Fed Chair vacancy—until this legal matter is fully resolved.” On Monday, many more Senate Republicans came out against the investigation.
This all seems like an “unforced error” on the part of the President. As noted above, if he left things alone, Mr. Powell would have likely resigned his position as a Governor, and the President would have been able to nominate someone more sympathetic than Powell to his stance on interest rates for that seat. In addition, his nominee for Chair probably would have sailed through confirmation. Now, someone like Kevin Hassett, who has the closest ties to the President of the potential nominees, will likely be more heavily scrutinized for independence and will be less likely to be confirmed. This is a shame because I think Hassett (whom I predicted in last week’s column to be the new Chair) has the capability of being an outstanding Chair.
However, Fed independence is of paramount importance. As I indicated in my April column:
- Independence means the Fed can set interest rates without interference from Congress or the Presidential administration. The reason this is so important is that politicians are usually in favor of lower interest rates because, in the short term, it makes their constituents happier. In the short term, lower interest rates result in higher economic growth and output, along with employment gains. However, in the longer term, this will typically lead to inflation. Politicians are more focused on the short term to enhance their popularity and potential future electability. As Austan Goolsbee, the current President of the Federal Reserve Bank of Chicago and voting member of the Federal Open Market Committee (the FOMC, which sets rates), indicated this morning on CNBC, in countries which do not have an independent central bank, their inflation is higher, their unemployment is higher, and their economic growth is slower. An independent central bank, like the Fed, can be a steady hand, considering both the short-term and the long-term, and providing more certainty for financial markets.
- As a businessperson, investor, or even just as a participant in the U.S. economy, an independent Federal Reserve should enable you to sleep better at night. It is the role of the Fed to ensure that you have a job, that your earnings maintain their spending power, and that the economy continues to grow to improve your quality of life. While the members of the Fed may not always be perfect, their independence allows them to put the U.S. economy first above all else.
So, this is why you should care what happens between the President and the Fed.
