Trump advocates for central power transfer from Powell to the Federal Reserve Board over the central bank's operations
In a move that could potentially shake up the Federal Reserve's (Fed) independence, President Donald Trump has called for the Fed's Board of Governors to take control from Chair Jerome Powell. This demand, made due to disagreements over interest rates, presents a significant political challenge to the Fed's decision-making process.
The Fed's primary responsibilities include stabilising prices and maximising employment. Trump's preferred measure of inflation is currently running at an annual rate of 2.6%, slightly higher than the Fed's 2% target. In response, Trump has suggested a 3 percentage point reduction in the Fed's benchmark rate, which is currently averaging 4.33%.
However, Trump's call for Powell's removal and immediate rate cuts disregards the Federal Open Market Committee (FOMC)'s collective voting system. This system, which comprises a 12-member panel, allows for policy decisions to be made democratically, not unilaterally by the Chair. Such a call threatens to politicize the central bank, which traditionally operates independently to avoid short-term political influence.
Powell's term as Fed chair extends until May 2026, giving Trump limited options to remove him directly. However, he can attempt to pressure other board members or await the term's end to appoint a successor more aligned with his views. Emergency meetings for out-of-schedule rate cuts are rare, making Trump's request for immediate rate reductions via board takeover highly unusual and potentially destabilising.
This situation could undermine market confidence by suggesting political interference in monetary policy, possibly leading to increased volatility or skepticism about the Fed’s mandate to manage inflation and economic stability independently.
Meanwhile, the July jobs report showed a slowdown, with only 73,000 jobs added. This figure represents a downward revision from the initially reported 164,000 jobs in June and 247,000 jobs in May, bringing the job totals to 14,000 and 19,000, respectively.
Two of the seven Fed governors, Christopher Waller and Michelle Bowman, have dissented, pushing for slight rate cuts. They issued statements on Friday, seeing tariffs as having a one-time impact on prices and the job market softening. Trump has welcomed these dissents, despite previously claiming the U.S. economy is booming.
The Supreme Court has suggested that Trump cannot remove Powell for policy disagreements. However, the White House is reportedly investigating whether Powell could be fired for cause due to cost overruns in the Fed's $2.5 billion renovation projects.
Trump has criticised Powell for not cutting short-term interest rates and referred to him as "stubborn" in a post on his Truth Social platform. Despite this, Trump continues to advocate for rate cuts, arguing they would lead to stronger growth and lower debt servicing costs.
[1] Source: Reuters, The Washington Post [2] Source: The New York Times [3] Source: The Wall Street Journal, The Hill
- This political standoff between President Trump and Federal Reserve Chair Jerome Powell, related to monetary policy and interest rates, could spark debates within general news, war-and-conflicts, and crime-and-justice sectors, as it questions the Fed's independence and potential politicization of the central bank.
- The ongoing policy disagreements between Trump and Powell, aligned with the recent employment data and dissents from Fed governors, could significantly impact policy-and-legislation decisions regarding the economy, as market confidence may be shaken and increased volatility may ensue.
