Trump's War on the Fed

How concerned should we be?

Jul 20, 2025

This post has been edited since it was originally issued, to clarify a few things in the text and to add some new links.

President Trump is not the first sitting president to regret his choice of a Fed chair, or who from time to time has attempted to use the power of the Oval Office to cajole the Fed into cutting interest rates for political reasons. All of the US presidents pictured above have had issues with their own Fed chairs, going back to Harry Truman whose tussles with the Fed culminated in the 1951 Treasury-Fed Accord, establishing the tradition of ‘Fed independence’ in monetary policy. But the last president pictured above was Ronald Reagan, who left office in 1989, and our current president Donald Trump seems to be taking his battles with the Fed to a new level, launching what looks an awful look like a war on the very independence of the Fed.

This past week, Trump reportedly met with House Republicans to discuss removing Fed Chair Jerome (Jay) Powell well before his term ends in May 2026, or alternatively announcing his replacement now while Powell serves out the remainder of his term as a lame duck Fed chair, creating what in the interim would in effect be a ‘Shadow Fed’. The President subsequently denied that he is planning to fire Powell, calling such a move “highly unlikely”, and this weekend’s Wall Street Journal features an ‘inside look’ at how Treasury Secretary Bessent reportedly talked the President off this particular ledge. [For a closer look at the “Shadow Fed” option, and how it might play out, read here.]

It is unclear whether the President of the United States is legally authorized to remove the Fed chair other than “for cause”, but the Supreme Court recently threw cold water on his ability to do so with some truly bizarre dictum in the case of Trump v. Wilcox. (Read Kagan’s dissent.) And so the President and his supporters are also ginning up patently pretextual reasons to remove Powell from office for cause, citing large cost overruns on a $2.5 billion renovation project at the Fed HQ. One close Trump ally, House Republican Anna Paulina Luna (FL), has even gone so far as to refer a related matter to the DOJ for potential criminal charges against Powell, presumably in an attempt to turn up the heat even further.

In typical Trump fashion, the President has begun taunting Powell, describing him as “stupid”, a “knucklehead”, a “numbskull” and a “fool” And Trump has now given him a cutesy nickname, “Too Late Powell”. The President’s primary criticism of Powell seems to be that under his leadership the Fed has been too slow or “too late” in cutting rates. And Trump now wants the Fed to resume its rate cuts immediately, without waiting to see how the economy reacts to his on-again off-again tariffs as it is currently doing.

The President has been a bit cagey about who he has in mind to replace Powell, but the leading candidates seem to be Treasury Secretary Scott Bessent; the chair of Trump’s National Economic Council, Kevin Hassett; and current Fed Governor Chris Waller, whose term in office runs to 2030. Former Fed governor Kevin Warsh has made no secret of his desire for the job, although Trump passed on him once before (in 2017) and Warsh’s previously hawkish views on monetary policy do not seem like a good fit with the President’s current low-rates agenda.

Trump has even floated the idea that when Powell leaves office he may have Scott Bessent take over as Fed chair while continuing to serve as Treasury Secretary, putting a final nail in the coffin of Fed independence from the Treasury. Students of Fed history may recall that the Treasury Secretary was at one time an ex officio member of the Federal Reserve Board, the predecessor to today’s Board of Governors, but Congress wisely put an end to this practice ninety years ago with the Banking Act of 1935. When asked about the possibility of his doing both jobs, Bessent reportedly replied that he would “do whatever the President wants”, which of course is exactly what the proponents of Fed independence are most worried about.

But what exactly is it that Trump wants the Fed to do, and why? How likely is this to happen? And why are Trump’s attacks on the Fed such a big deal?

Let’s explore.

What does Trump want the Fed to do? President Trump wants the Fed to cut interest rates, which at first glance seems like no big deal. Many other presidents have called on the Fed to cut rates, calls which the Fed has generally ignored. And how big a deal would it really be if this time around President Trump succeeded in convincing the Fed to cut rates a bit prematurely, say by 25bp or even 50bp? After all, the Fed can always reverse course later if it needs to.

But Trump wants more from the Fed than another small rate cut, a lot more. And he is not making suggestions to the Fed, he is making demands on the Fed, demands which he is reinforcing with threats to fire the Fed chair.

Specifically, the President wants the Fed to cut rates immediately by 300bp (ie three percentage points), a truly extraordinary demand. Keep in mind that the target fed funds rate is currently set at 4.25-4.50%, down 100bp since August of 2024. If the Fed were in fact to cut rates by another 300bp, the fed funds rate would fall to 1.25-1.5%, well into negative territory in real (inflation-adjusted) terms, with inflation currently running at 2.75-3%. If implemented over time, a rate cut of this magnitude would not be unprecedented, but it would be highly unusual in the context of anything other than a serious economic recession or a financial crisis. Which by all accounts is not the current state of play.

According to the President, the United States is now the “hottest Country in the World” with “no inflation” (???) and “COMPANIES POURING INTO AMERICA”. In his mind the ‘hot’ US economy apparently justifies an immediate rate cut by the Fed, perhaps as some sort of reward to the President for his superb economic leadership. “LOWER THE RATE!!”, the President has demanded, “and thank you for your attention to this matter!” And lest we think that this is just Donald Trump being his usual hyperbolic self, the generally more reflective Speaker of the House, Mike Johnson (R-LA), is now saying exactly the same thing. When asked recently why he thinks the Fed should cut rates as called for by the President, Johnson reportedly said “because the US economy is hot”.

Why does the President want the Fed to cut rates now? One does not need a PhD in economics to understand that cutting interest rates in a booming economy is a somewhat counter-intuitive monetary policy to put it mildly. The presidents of Turkey and Hungary have ordered their own central banks to cut interest rates in an attempt to quell stubbornly high inflation, with predictably disastrous results, And in any event President Trump does not think the United States is currently experiencing any inflation, let alone stubbornly high inflation, which he says was a Biden era problem vanquished under the Trump administration. So why exactly does he want the Fed to cut rates?

Well, the simplest explanation may be that the President is worried about a coming economic downturn in response to his self-inflicted tariff chaos. More economic data showing the impact of Trump’s tariffs will come in over the next few months, and it may be that the President wants the Fed to get ahead of the curve and cut rates now in order to preempt or mitigate this future impact. This is not an unreasonable position to take, of course, but it is generally considered to be the job of the Fed and not of the President.

Alternatively (or in addition), the President may want the Fed to cut rates so as to drive the price of US stocks even higher, which many Americans will interpret as a big vote of confidence in the President’s economic leadership. Or less charitably, he may think that a big cut in rates will turbo-charge the market for bitcoin and other crypto assets, which account for a large share of the President’s personal net worth.

But there is another even more troubling explanation that we should consider, one that is entirely consistent with what the President has said publicly and which goes to the heart of concerns about Fed independence. According to the President, the Fed should slash interest rates for the express purpose of reducing the cost of servicing the federal debt, in effect employing the power of the Fed to ease the pain associated with our growing fiscal deficits, which are about to grow even larger after passage of the President’s Big Beautiful Bill.

In a recent Truth Social post, the President had this to say: "Our Fed Rate is AT LEAST 3 Points too high. ‘Too Late’ [Powell] is costing the U.S. 360 Billion Dollars a Point, PER YEAR, in refinancing costs. LOWER THE RATE!!”

Ah so now we have it. According to the President of the United States, the Fed should cut interest rates not for the purpose of promoting stable economic growth and low inflation in the real economy, or to maintain stability in our financial system, but for the express purpose of reducing the cost to the federal government of servicing its large and rapidly growing federal debt. Doing so would put the Fed back into the business of financing federal deficits, a practice which Republicans have (rightly) warned against for decades and which was supposed to have ended during the Korean War, with the advent of the Fed’s monetary independence from the US Treasury.

Is Trump likely to get his way? President Trump himself has said that he is “unlikely” to fire Chair Powell, if only because he fears an adverse reaction from the bond market, which plays a critical role in funding the federal debt. But Powell’s term as chair expires in May of next year, well before the mid-term elections, and President Trump will no doubt replace him, most likely with someone more willing to do the President’s bidding. And because it takes only fifty-one votes in the Senate to confirm a new Fed chair, the current Republican Senate will almost certainly approve Trump’s appointment, regardless of how unqualified the candidate may be, as they have with a number of other high-profile appointments to Trump’s cabinet.

But even with a new Fed chair, there is virtually no chance of the Fed cutting rates by anywhere near the 300bp the President is demanding. Interest rate policy is not unilaterally set by the Fed chair; it is determined in a deliberative process by twelve members of the Fed Open Market Committee, a statutory body of which the Fed chair is only one member (although typically the most powerful member). The FOMC includes all seven members of the Fed Board of Governors, only three of whom (including Powell) were appointed by Trump, with one additional seat coming up in January. [This is the seat of Adrianna Kugler, who was appointed by Biden in 2022 to fill the short remaining term of departing Fed governor Lael Brainard.] The remaining five voting members of the FOMC are selected on a rotating basis from among the presidents of the twelve Regional Reserve Banks (including always the President of the New York Fed), the hiring and firing of whom is not controlled by the President.

But note here that while Powell’s term as Fed chair ends in May of 2026, his term as a Fed governor does not expire until January 2028. Treasury Secretary Bessent has stated publicly that he expects Powell to resign as a Fed governor immediately upon being replaced as chair. But there is some chance that Powell may decline to do so if he does not have confidence in his replacement or if he feels that Fed independence is truly at risk, a possibility we should not overlook.

Would a big cut in rates necessarily slash the federal government’s interest bill, as Trump claims? No, it would not, despite what the President has said publicly on this point. But it is important that we all understand why, even if the President does not. The only interest rate determined directly by the Fed is the ‘fed funds rate’, which is the overnight interest rate paid on inter-bank borrowings of excess reserves held on deposit at the Fed. The Fed does not set the interest rates at which banks lend to their customers, the rates at which companies borrow in the bond market, the rates paid by homeowners on their mortgage loans, or even the longer-term interest rates paid by the US government. And while it is true that the level of the feds funds rates has an indirect but important influence on all these other rates, particularly for shorter-maturity loans, the relationship is not 1:1 and sometimes it is not even positively correlated.

When the Fed began cutting rates in September of 2024, it probably expected that its cuts would largely filter through to longer-term interest rates as well. But this is not what happened. The feds fund rate was reduced by 100bp (cumulatively), but longer-term rates moved up rather than down, with the yield on 10-year UST bonds increasing by 75bp and the rate on 30-year mortgages increasing by 25bp.

And while another 100bp cut in the fed funds rate would almost certainly reduce the cost of short-term borrowing by the US government by a similar amount, it would not necessarily have this same effect on the market rate of interest for longer-term UST debt. And it could well cause longer-term rates to go up (not down), particularly if the Fed’s rate cut is perceived by the bond market as having been politically motivated and economically unwarranted.

But even if the bond market did react favorably to the Fed rate cuts demanded by the President, the potential interest savings to the US government would be nowhere near the amount claimed by the President.

Recall that President Trump has said publicly that each 100bp cut in rates by the Fed would lower the total amount of annual interest paid by the federal government by a whopping $360 billion, which presumably means that a 300bp cut would slash the federal interest bill by three times this amount, $1,080 billion ($1.08 trillion). But this amount is well over 100% of what the federal government actually pays in total interest, ca $950 billion in fiscal 2025, so something is clearly wrong here. But what is it?

Well, let’s look at the total amount and composition of US federal debt outstanding. The President seems to believe that the federal government pays interest on $36 trillion of total federal debt, on which a 100bp reduction in interest rates would in fact save the federal $360 billion a year, if that rate cut reduced the current rate of interest on all of the federal debt. But while $36 trillion is in fact the total gross amount of federal debt, this includes $6+ trillion of intra-governmental debt, obligations on which the federal government pays interest to itself, netting out to zero. For our purposes, the more relevant figure is the $30 trillion of US debt held by the public, which excludes this intra-governmental debt, on which 100bp of savings would total to $300 billion a year, $60 billion less than the President has said.

But even this is not close to correct, because this $30 trillion is almost exclusively fixed-rate (not floating-rate) debt which is not all due and payable currently, and most of it will not mature and be refinanced for many years to come. In fact, only one-third or so of the total federal debt held by the public gets refinanced each year, so we are talking about roughly $10 trillion per year (at current debt levels). This $10 trillion includes roughly $6 trillion of UST-bills, with an initial maturity of one year or less, plus another $4 trillion or so of Treasury notes and bonds, which were originally issued with longer maturities of two to thirty years but which are now coming due in the next twelve months. A 300bp cut in the fed funds rate, to say 1.5%, would indeed result in big savings on the $6 trillion of T-bill refinancing, given current bill rates of 4.5% or so. But this this is not true for the $4 trillion of refinanced notes and bonds, which bear a current interest rate of only 2.5-3%. [A large portion of these notes and bonds were issued in the low-interest rate environment following the global financial crisis of 2008 and the covid pandemic of 2000.]

And so by my math, even a 300bp cut in the fed funds rate would not save the federal government more than $60 billion or so of annual interest expense in the first year, and it could save the government even less if the rate cut caused longer-term bond yields to increase. It is true that $60 billion a year is not a trivial amount of money by any means, even for the federal government, but it is $300 billion less than what the President has told us to expect.

What exactly do we mean by ‘Fed independence’ and why is this such a big deal?
Ah, now we get to the heart of the problem, which is Trump’s visceral attack on the Fed’s ability to set interest rates without undue presidential interference. The notion of Fed ‘independence’ does not, and should not, extend far beyond this. The Fed is a creation of Congress, and it is Congress that sets the limits of Fed authority, which the Fed sometimes appears to forget. But the President’s recent attacks on Chair Powell are not only clear threats to this more narrow understanding of Fed independence; they go well beyond this to undermine much of what the Fed does.

The problem with the President’s recent actions is not simply that he has been jawboning the Fed to cut rates, as other presidents before him have also done (admittedly with more tact and politesse). Or simply that the President may want to replace Chair Powell when his term expires in May, or possibly before. Or even that the President will likely seek to replace Powell with a candidate whose primary qualification for office is his personal loyalty to Trump.

No, the big problem here is that President Trump seems hell bent on attacking the very essence of Fed independence in the operation of monetary (interest rate) policy, which for seventy-five years now has underpinned the credibility of the global USD-based financial system. The President not only wants the Fed to set interest rates at his direction, he also wants the Fed to do so for the express purpose of financing the rapidly growing federal debt, which the Fed is not authorized by Congress to do. And this being Donald Trump, we should not be surprised if he later attempts to weaponize other Fed operations (eg financial regulation/supervision and the extension of credit to banks and financial institutions) in the pursuit of his own personal and political priorities.

As stated by economist Mike Konckzal, “The conservative attempt to take over the Federal Reserve isn’t about Powell being off by one cut. It’s about whether the Federal Reserve can continue to exist as an independent institution. Trump and his allies aren’t arguing for better policy. They’re arguing for a Fed that does what they say, because they’re running up deficits and want someone else to take the hit.”

Under the Federal Reserve Act (and other legislation), Congress has granted the Fed legal authority to manage the US money supply for the sole purpose of promoting stable prices, full employment and moderate long-term interest rates, period full stop. Congress has not authorized the Fed to use monetary policy for the purpose of financing the federal debt, and fiscal conservatives in and out of Congress have regularly challenged the Fed whenever it has seemed to be doing so, as for example when the Fed cut interest rates to zero and purchased trillions of dollars of government debt on the secondary market in the wake of the global financial crisis and the global covid pandemic. But many of these same Fed critics, most notably those still in Congress, are now curiously silent as President Trump takes this same practice to a new more dangerous level.

What are the capital markets telling us about Trump’s war on the Fed? Since President Trump took office six months ago, the capital markets have been quite volatile, but are broadly unchanged over the entire period if we ignore the intra-period volatility. The US stock market is once again at or near record-high price levels, having recovered from its 20% correction following the announcement of the President’s Liberation Day tariffs. The yield on US Treasury debt is once again about where it was in January, at both the ten-year and thirty-year maturities. And while this might be viewed by the President and his supporters as a vote of confidence in the US economy under President Trump, the signals from other parts of the capital markets are less reassuring.

The value of the US dollar (DXY) on the foreign exchange markets has fallen by over 10% since President Trump took office, a big move which might explain some of the apparent resiliency of US stock and bond prices (which generate USD cash flows and are quoted in USD). The best performing asset classes so far this year have been non-US equities along with gold and bitcoin, the last two of which generate no current income and are valued by investors as hedges against rising US inflation and the further depreciation of the US dollar. Less charitably, investments in gold and bitcoin may be viewed as bets against the future of the US dollar and the USD financial system.

Investments in gold and bitcoin are not ‘America First’ bets; they are bets on America’s decline. And the market price of these investments is up strongly under President Trump, presenting a somewhat darker perspective on the President’s attack on the Fed, as well as his pledge to make America the “crypto capital of the world”.

The elephant in the room. Trump’s challenge to Fed independence is an important story in its own right, which has gotten a lot of coverage in the financial press but likely has not resonated strongly with the average American voter, let alone with diehard Trump supporters. But Trump’s attack on the Fed is part of something much larger and more troubling: his mission to take personal control of the core American institutions which we depend upon to keep the federal government and our elected officials in check, including the press, the courts, universities, our military and trade alliances, and even Congress. And now the President has set his sights on the Fed, one of the foundational pillars of the global USD financial system and of American prosperity.

And it is this story that we should all be focused on, the threat to American institutions coming from the current President of the United States. Some readers will applaud these moves by President Trump, and others will despise them, but in either case these are events of truly historic importance, the consequences of which may be felt for generations to come.

Links

The Fed Must Be Independent, Janet Yellen and Ben Bernanke, New York Times, July 21, 2025

Firing Powell Would Shatter the Economy’s Inflation Defenses, Greg Ip, Wall Street Journal, July 20, 2025

How Far Off is Dollar Doom, The Economist, July 20, 2025

Does Trump Have the Authority to Fired the Fed Chair? Wall Street Journal, July 17, 2025

Firing Powell Would be a Blunder, WSJ Editorial, July 17, 2025

The Safeguard and the Danger if Trump Fires Powell, NY Times, July 17, 2025

Trump Wants Lower Rates, Firing Powell Could Push Them Higher, NY Times, July 17, 2025

The Case for Cutting Rates Now, Chris Waller, Federal Reserve, July 17, 2025

Trump, Powell, The Budget, Tariffs and ….Interest Rates, Jared Bernstein Substack, July 17, 2025

Stablecoins Might Cut America’s Debt Payments. But at What Cost? The Economist, July 16, 2025

Why You Should Fear a MAGAfied Fed, Paul Krugman, July 11, 2025