The End Of Fed Independence?

Trump's threat to the independence of the central bank is very real -- but I'm not sure how potent it is.

Photo by Alex Bierwagen on Unsplash

Way back in 2017, I attended a political science conference in which we debated the question of just how disruptive Donald Trump would be to the global political economy.¹ At the time, I was wary of Trump’s trade agenda but argued that the real tell was to look at his appointments to the Federal Reserve. The independence of the Fed had been key to ensuring inflation would stay low even if that was politically unpopular at times. If the Fed appointments started going off the rails, and the GOP went along with going off the rails, that would be the most important tell.

Trump’s first term proved to be a mixed bag in that regard. In 2017 he appointed Jay Powell to replace Janet Yellen as Fed chair, even though Yellen had done a pretty great job. But Powell has been fine as well, as Biden’s reappointment of him suggests. By 2019, however, Trump was nominating the likes of Herman Cain and Stephen Moore for seats on the Fed’s Board of Governors. Both picks were widely panned, however. Senate Republicans pressured Trump to withdraw their names from consideration, and both wound up withdrawing. Similarly, Trump repeatedly threatened to fire Jay Powell during his first term. The Fed chair shrugged off such threats, however, and Trump backed down.

All of this suggested that the system still had guardrails.

It was a simpler time.

Trump’s second term has been chock full of threats and actions to impose his will on the Federal Reserve. As with his first term, most of these efforts have not been successful — but that does not mean the cumulative effect on the Fed is not real. As I noted in January:

Even by undertaking this effort, Trump is paving the way to weaken Fed independence down the road. Every time Trump takes an unprecedented action, breaks with historical precedent, or just plain violates the law, he makes it easier for folks to adjust to similar behavior in the future. Trump is inoculating the political and business classes against being outraged by foisting an ever greater number of outrages. Attempting to force Powell out this way could make it easier for Trump to threaten something similar against the next guy the moment he balks at doing whatever Trump wants.

Unfortunately, the hard-working staff here at Drezner’s World is seeing this concern articulated elsewhere. The Wall Street Journal’s Nick Timiraos has a long story about this very worry:

After receiving subpoenas concerning his testimony months earlier about the Fed’s building renovations, Powell released a bold video dismissing that explanation. “Those are pretexts,” he said, stone-faced, and accused Trump’s Justice Department of threatening him with an indictment because the Fed hadn’t cut interest rates as fast as the president demanded.

Powell’s gambit had its intended effect, rallying bipartisan support to the Fed, which, for now, has preserved its independence.

But even those who cheered his defiance in the skirmish aren’t sure the Fed can win a longer war against sustained presidential pressure. Powell’s term as chair ends in May, and the qualities that made his stand possible don’t automatically transfer to his successor.

Trump, meanwhile, has three more years and every motive to keep finding new ways in….

Former Fed officials worry its independence won’t be secure until the president himself backs off. “I’m very pessimistic about whether the U.S. can avoid total partisan control of monetary policy over the remainder of Trump’s term,” said Jon Faust, who served as Powell’s senior adviser from 2018 to 2024.

He said the country was no longer shocked that Trump would bend other ostensibly apolitical institutions such as the Justice Department and the FBI to his will. “I’m through with being surprised. I think he’ll try to push it that far,” said Faust.

So is Fed independence now at risk from Trump? Well yes, a lot of concepts previously taken for granted are now kind of up in the air! Trump’s nominee to replace Jay Powell is Kevin Warsh, and boy does he seem eager to please Trump.

So this is a big concern! But Fed independence might be the one remaining thing that Republicans in the Senate and on the Supreme Court are willing to push back on against Trump. The initial SCOTUS decision on Trump’s efforts to remove Fed governor Lisa Cook came down in her favor, for example. Even the conservative Justices who have been willing to go along with Trump on a lot of shady stuff have written opinions that are variations of, “the Fed is different.”

In the Senate, Senator Thom Tillis announced back in January that until the administration drops their criminal investigation of Powell, he would keep Warsh stalled in committee. And while Tillis might be willing to appease Trump on a variety of issues, he’s not yielding on this one. According to the WSJ’s Timiraos, “Tillis hasn’t backed down, repeating that until the probe is over, he won’t vote any nominee out of the banking committee. With all Democrats on the panel taking the same stand, the 13-11 GOP majority isn’t enough to push a nominee through without him.”

Compared to most other institutions that Donald Trump despises, the Fed is doing pretty well! But the guardrails have clearly eroded and eroded badly. Unless the Senate flips in November, Trump can exercise an uncomfortable amount of latitude in pressuring the Fed to do his bidding.

1. For the political scientists reading this: it was kinda the academic version of debating the Musgrave Tweet.