Dismissal Occurring at Federal Board: Trump Seizes Opportunity
In the latter half of his presidency, Donald Trump exerted pressure on the Federal Reserve (Fed) to lower interest rates, aiming to stimulate consumption and investment. However, the Fed maintained its independence, prioritising economic data over political pressure.
Trump's persistent calls for rate cuts were met with resistance. The Fed, under Chair Jerome Powell (whom Trump appointed), gradually raised rates in 2017-2018 in response to a strong economy. This approach changed in 2019, as growth slowed and trade tensions increased, with the Fed cutting rates to adhere to its dual mandate of price stability and maximum employment.
Trump's vocal criticism of Powell, including threats to fire him in 2025, heightened market uncertainty and concerns about the Fed's independence. Despite these episodes, the Fed's autonomy remained largely intact.
The interest rate, which determines the rate at which banks can borrow from the central bank, directly impacts the US economy by influencing borrowing costs, inflation, and employment. During Trump's presidency, tariffs and trade wars introduced inflationary pressures, leading to cautious "strategic patience" in rate adjustments.
The resignation of board member Adriana Kugler has opened up a seat in the central committee that sets the crucial interest rate. Trump sees this as an opportunity to indirectly exert influence through the selection of loyal followers.
Despite Trump's demands, the Fed, due to existing inflation risks from Trump's trade policy, is opting for a cautious monetary policy and hesitating to cut interest rates. However, dissenting voices are emerging. At the latest decision of the central bank council, two members, Michelle Bowman and Christopher Waller, advocated for a reduction in interest rates. Waller, who is said to have political ties to Trump, is considered a possible successor to Powell.
Trump's influence on the Fed created notable political and market tensions, but the central bank maintained its data-driven approach, thereby carefully managing inflation and economic growth. The Fed’s interest rate decisions influenced key economic variables that indirectly affected Trump’s political standing, though direct causal links to approval ratings require specific polling analysis.
Trump's public clashes with the Fed might have been perceived negatively by markets and some voters concerned about policy stability and economic uncertainty. However, the full impact on Trump's approval ratings would depend on broader economic conditions and other political factors beyond Fed policy alone.
As of mid-2025, the federal funds rate settled around 4.25-4.5%, the highest since 2007. Trump has not yet received what he demands and has repeatedly threatened Powell's dismissal, but the legal hurdles for such a step are high. Trump has stated that he would replace Powell in a heartbeat, but is concerned it would unsettle the market.
In conclusion, Trump's influence on the Fed has been significant, creating tension between political leadership and central bank independence. Yet, the Fed has managed to maintain its data-driven approach, carefully navigating the economic landscape under Trump's presidency.
- The persistent demands by Trump for interest rate cuts have caused tension between politics and the Fed's independence, with two members, Michelle Bowman and Christopher Waller, advocating for a reduction in interest rates during the latest decision of the central bank council.
- Trump's influence on the Fed has been significant, as he sees the resignation of board member Adriana Kugler as an opportunity to indirectly exert influence through the selection of loyal followers, potentially impacting the Fed's monetary policy decisions and the US economy.
