New York
CNN
—
The Federal Reserve kicked off its second Trump era right where it left off: Doing exactly what it wanted to do, ignoring President Donald Trump’s demands that it lower rates.
As you’d expect, the move was poorly received by the president.
Hours after the Fed announced its decision to hold rates steady on Wednesday, Trump, who nominated Fed Chair Jerome Powell in his first term, accused Powell and his colleagues of failing “to stop the problem they created with Inflation,” according to a post on Truth Social.
Although Trump has danced around the issue of whether he’ll fire Powell or work to gain direct control of interest rate decisions, both of which Powell has said is illegal, Trump’s latest clash with the Fed reopens the door to a radical possibility that the central bank, as most have come to know it over the last few decades, could be turned on its head.
A brewing feud
The decision not to lower rates further came after the Fed slashed its key interest rate by a full percentage point over its prior three meetings last year, right before Trump took office.
On the campaign trail and since taking office, Trump has not only advocated for lower interest rates but said he’ll “demand that interest rates drop immediately,” as he told attendees of the World Economic Forum’s annual meeting last week.
Lower interest rates tend to raise stock prices and make it cheaper for people to borrow money, often giving a boost to a president’s favorability. But lowering interest rates can also fuel higher inflation.
In a press conference Wednesday after the Fed’s latest rate decision was announced, Powell had little to say about Trump’s remarks concerning the Fed.
“I am not going to have any response or comment whatsoever on what the president said,” Powell told reporters. “It is not appropriate for me to do so.”
“The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals and really keeping our heads down and doing our work, and that’s how we best serve the public,” Powell added.
Powell, who has been at the helm of the Fed since 2018, has been standing firm that as members of an independent government agency, Fed officials have no obligation to the president or any elected official. Furthermore, when asked by a reporter in November if Trump can fire or demote him or his colleagues on the Fed’s board of governors, Powell curtly replied, “Not permitted under the law.”
Independence is a core pillar of the Fed
“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” Powell said in a speech two years ago. “But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”
When the Fed began raising interest rates in the spring of 2022, Powell was receiving most of his criticism from Democrats — especially Sen. Elizabeth Warren of Massachusetts, who in a June hearing that year accused him of sacrificing Americans’ jobs for his inflation fight, warning he would “drive this economy off a cliff.” (He didn’t.)
At the time, the Fed had been aggressively raising interest rates to tame inflation, which hit a 40-year high in 2022. The Fed’s actions that year substantially raised borrowing costs for Americans and the stock market suffered its worst year since 2008. But without the rate hikes, inflation, which now hovers near the Fed’s 2% target, could have remained elevated, adding to the financial stress many Americans are already experiencing.
“The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors,” Powell said in his 2023 speech.
Ellen Meade, a Duke University economics professor who had a 25-year career at the Fed, has coauthored research — which Powell and other current and former Fed officials have cited — that supports that view.
Her research suggests that central banks with a higher degree of independence, which was measured based on factors such as if rate-setting officials cannot be easily fired by politicians as well as whether government officials can participate in policy meetings or overturn decisions, generally have lower inflation.
The primary reason for that, as Powell pointed out as well, is that more independence frees central bankers from having to succumb to short-term political pressures, which can often lead to inflationary policies. That also helps create more stable economic growth in the long term, Meade said, based on her research and other similar findings.
But by the same token, central banks have better economic outcomes when they are held to account by lawmakers and operate under policy mandates like the Fed’s, which calls for the bank to target an annual inflation rate of 2% and full employment.
If efforts to undermine the Fed’s independence are successfully challenged, it would be akin to “removing the institution,” Meade told CNN.
The steep cost of playing politics
The Fed is widely considered an independent institution, partly based on interpretations of the 1913 law that established it and the reforms brought by the 1935 Banking Act. But its independence, highly regarded by Wall Street, is a feature that gained its legitimacy through history.
However, there have been times when the Fed did not act independently, which came at a steep cost.
In the 1970s when Arthur Burns steered the Fed, he was known for his chummy relationship with then-President Richard Nixon. At the time Nixon was campaigning for reelection, the US economy showed signs of inflation brewing. That should have prompted the Fed to begin the painful process of hiking rates to stem price pressures, but, knowing it would hurt Nixon’s ratings in the polls, Burns resisted tightening policy.
The Fed’s lack of independence in that situation contributed to a painful period of persistently elevated inflation, famously known as “the Great Inflation,” former Fed Chair Ben Bernanke argued in his 2022 book on monetary policy. It was not until Paul Volcker came along to lead the Fed that inflation was finally vanquished, and he did that in large part by making policy decisions based solely on what economic figures call for, not based on what a sitting president demands.
That commitment to being data dependent has stuck around ever since.
Recognizing the Fed’s failings in the 1970s, Congress amended the Federal Reserve Act in 1977 to include additional reforms, such as requiring the Fed chair to report to Congress twice a year to testify on the central bank’s activity. That expanded on the 1935 Banking Act, which weaned the Fed away from the Treasury Department to minimize partisan influence and established the Fed’s policymaking committee in its current form.
“The assumption that law is the exclusive source of Fed independence is wrong,” said Peter Conti-Brown, a financial regulation scholar, in a Yale Journal on Regulation study. “But the opposite assumption, that law is irrelevant, is also incorrect.”
How Trump could win a challenge to the Fed’s independence
The Banking Act of 1935 states that the president may remove members of the Fed’s board of governors, the group of Fed officials that includes Powell, who are responsible for setting interest rates along with regional Fed reserve bank presidents “for cause.”
While not explicitly defined, “for cause” removal has generally been interpreted to mean more than, for instance, “policy disagreements,” said Christine Chabot, a law professor at Marquette University, whose teaching focuses on constitutional law and US government agency independence.
A Supreme Court case in 1935, Humphrey’s Executor v. United States, established precedent over how much power the president has in removing agency heads. The case involved William Humphrey, “an aggrieved conservative commissioner on the Federal Trade Commission, who was fired by Franklin Roosevelt in 1933 over policy differences,” the Brookings Institution wrote in a 2018 analysis.
Humphrey died shortly after his dismissal, but his executor sued for damages. The Court ruled in favor of the executor, saying the Constitution does not say the president has the “illimitable power of removal.”
Despite that ruling and the 1935 Banking Act, the question at hand, Chabot said, is whether that restriction is in violation of the executive power granted to a president to appoint in the Constitution.
In the 2024 Supreme Court case of Trump v. United States, “the Court recognized an unrestricted power of removal (of appointees) as one of the president’s core powers under Article II of the Constitution,” she said. Therefore, that could be used to make the case that the “for cause” removal clause currently limiting Trump’s ability to fire or demote Powell is unconstitutional.
At the same time, Chabot pointed out that prior Supreme Court cases such as Seila Law LLC v. Consumer Financial Protection Bureau, which ruled that a president can remove a CFPB director without cause since they have sole control of the agency, have been careful to “carve out” what’s referred to as “a special historical status for the Federal Reserve.”
That status dates back to the Sinking Fund Commission, an independent group proposed by Alexander Hamilton, which was authorized by the first US Congress to help manage the government’s debt by buying and selling bonds. The two highest members of the commission were not subjected to at-will removal by a president.
That demonstrates “there’s a very good precedent for the Federal Reserve, in particular, being independent,” especially since it similarly buys and sells US debt, but in its case to affect interest rates, Chabot said. On the flip side, the initial three US departments established did not restrict a president’s power to remove leadership there. “So, somebody could say, ‘Well, that’s really the historical precedent we should follow here.’”
But putting history aside, the Court would likely also take into consideration the economic implications of restricting the Fed’s independence and its ability to carry out its congressionally mandated duties, Chabot said.
For instance, US Treasury yields, which influence the rates Americans pay to borrow money, “could skyrocket,” a reflection of the larger premium traders would price in “for greater policy uncertainty and higher inflation expectations,” Meade told CNN.
Trump may succeed in requiring Fed chair to meet with him and explain decisions
On the campaign trail Trump said, “I feel the president should have at least a say in there. I feel that strongly,” referring to the Fed’s interest rate decisions. “I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve — or the chairman.”
But after a barrage of backlash, Trump sought to soften that position. “A president certainly can be talking about interest rates because I think I have very good instincts,” Trump said in a Bloomberg News interview less than two weeks after he claimed he deserved a say. “That doesn’t mean I’m calling the shot, but it does mean that I should have a right to be able to talk about it like anybody else.”
Mandating that Fed chairs and other officials meet with him will likely be a much easier case to win than removal of chairs and other Fed board members, said Chabot. That’s because the Constitution specifies that the president “may require the Opinion, in writing, of the principal Officer in each of the executive Departments, upon any Subject relating to the Duties of their respective Offices.”