Testing the limits of Fed independence under Trump

Donald Trump’s criticism of the US Federal Reserve and its Chair, Jerome Powell, has grown more intense over recent months. In fact, Trump’s political focus now appears to revolve around monetary policy. From repeated calls for sharp interest rate reductions to outspoken attacks on Powell’s leadership, the president has depicted the Fed as an obstacle to growth rather than as an independent, technocratic institution tasked with maintaining economic stability. Trump has questioned Powell’s competence, suggested that key officials should be replaced, and promoted a narrative where the central bank should prioritize the White House’s agenda.

Powell is now under investigation by the Department of Justice, and although Trump has denied that he was behind the investigation, Powell’s response hints otherwise: “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.

“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation,” he says.

Powell also spoke at the Jackson Hole symposium. Without naming Trump, he reaffirmed the Fed’s commitment to data-driven decision-making and long-term price stability. The question is, how much can Trump push the Fed to adapt to his rules, and what will the likely effects be?

Omar Rachedi, Professor in the Department of Economics, Finance, and Accounting at Esade, has closely analyzed the risks that Trump’s pressure poses to the Fed’s independence. Writing in Expansión, Rachedi argues that the conflict is deeper than just personality or politics. It brings into question the foundations of the financial system and the credibility upon which it is built.

What does Trump want from the Fed?

Trump is focused on immediate visible improvements in economic performance. He wants to cut interest rates to give cheap credit, which in turn will sustain economic growth. When interest rates are low, they also keep financial markets buoyant and facilitate the financing of large fiscal deficits.

The Fed is resistant to the proposed scale of the cuts. Trump favors fast growth, whereas the Fed is more concerned with inflation dynamics and long-term stability.

And Trump is taking the informal route to exert pressure on the Fed. Rather than leverage formal legal changes, he is using public messaging, social media and the appointment process to try and steer the Fed where he wants it to go. He praises some Fed officials and berates others in an attempt to mold expectations about the decisions he feels the Fed should make.

As Rachedi notes, this approach suggests that Trump is not just seeking lower rates, but a “more compliant central bank, willing to finance his growth agenda with cheap credit.”

Once inflation expectations slip, wages, prices, and rates all follow, making it far harder to bring inflation back under control

Jerome Powell draws the line: cuts yes, submission no

Powell is mostly resilient to Trump’s sustained interference. He’s not averse to cutting interest rates, but emphasizes that it must be backed by economic data. Any cuts would be more limited and gradual than Trump is demanding.

Why? Because a fundamental principle of monetary policy is that inflation expectations take priority over short-term bursts of economic growth and political demands. The beliefs of households, businesses and investors affect how they act. If they see inflation rising unchecked, then the ripple effect means that wages, prices, and interest rates all rise in response, which then makes inflation harder to control. Anchoring expectations requires credibility, and credibility depends on independence.

Rachedi notes that when political pressure guides monetary decisions, markets begin to question whether the central bank will act decisively when needed. “Politicizing a central bank doesn’t make money cheaper: it makes credibility cheaper,” he says.

What happens when markets stop trusting the Fed?

Rachedi warns, “Short-term political wins can lead to tighter financial conditions later, forcing harsher monetary tightening down the line.”

When investors doubt the Fed’s independence, Wall Street’s concerns quickly become Main Street’s problems

If investors view the Fed as losing its independence, they see that as a risk, and so demand higher compensation for holding US debt. In turn, that produces higher borrowing costs across the economy as a whole.

In effect, ‘Wall Street’ connects directly to ‘Main Street’. US Treasury bonds are the basis of the financial system. Mortgage rates, corporate loans, and even the cost of public debt are priced in relation to government bonds. If investors lose trust in the Fed and require a higher risk premium, interest rates rise not only for the government but also for households and businesses. Life in general starts to cost more.

With US public debt at around $30 trillion, even a minuscule increase in interest rates can translate into tens of billions of dollars in additional costs each year. And that burden would be shared by taxpayers, companies, and consumers.

Global repercussions

It’s not only the US economy that could suffer if the Fed loses credibility and trust from investors. Shifts in global capital flows can affect emerging markets, such as Latin America.

When uncertainty rises in the US, capital retreats, currencies weaken, and borrowing costs increase abroad.

Rachedi also highlights that the dollar’s global role is a matter of reputation, and reputations can erode. “The dollar’s dominance is based on trust, not entitlement,” he notes.

Political pressure on the Fed could chip away at the dollar’s standing as a safe-haven currency. No law says the dollar has to be trusted globally. The dollar’s power rests on belief in US institutions, policy predictability, and the credibility of its central bank.

Europe’s opportunity

For Europe, there’s an interesting prospect. A weaker dollar would give the euro a chance to gain international weight. Strengthening the euro would first require the development of a true European safe asset, such as eurobonds, backed by deep, liquid, and integrated capital markets.

Not just ideology, but economic sovereignty, building resilient financial infrastructure would allow Europe to absorb shocks, lower financing costs, and play a more autonomous role in the global system.

If central bank independence becomes negotiable in the world’s largest economy, the question is no longer whether markets will react, but which regions will be ready to navigate to a position of greater financial stability.