Lately, President Trump has been pressuring Federal Reserve chairman Jerome Powell to cut interest rates. This has set off concerns about Federal Reserve independence. And reasonably so. Generally speaking, the more independent the central bank is from political pressure, the better the country’s economy performs on monetary measures like inflation (interested readers can find a survey of the literature here). Indeed, the Banking Act of 1935 significantly changed the Federal Reserve’s structure to make it more independent from the Executive branch, and Congress in general.
To be fair, Trump isn’t the only one trying to reduce Federal Reserve independence. Libertarian-leaning folks also call for reduced Fed independence with slogans like “Audit the Fed!”
But how much influence would an individual president have over Federal Reserve monetary policy? Probably not much.
Monetary policy is determined by the Federal Open Market Committee (FOMC), a 12-person committee made up of the 7 members of the Fed’s Board of Governors, the president of the Federal Reserve Bank’s New York branch, and 4 rotating Federal Reserve Bank presidents from other branches. Of these 12 members, only the Board of Governors are appointed by the President (and confirmed by the Senate) to 14-year terms. Of the current members (Jerome Powell, Philip Jefferson, Michelle Bowman, Michael Barr, Lisa Cook, Adriana Kugler, Christopher Waller), only one has a term expiring during this Trump administration (Adriana Kugler). Powell’s term as chairman expires, but he remains on the board until his 14-year term is up. Assuming each individual serves out their entire term, Trump could only appoint one person to this 12-member committee. Even if this person is a puppet, one vote does not a majority make. Even if one wants to include the three current members appointed by Trump in his first term, that still only means 4 votes out of 12.
Now, readers will notice a problem in that last sentence. “Jon, you sly and handsome devil,” I hear you cry, “These are 14-year terms. How could Trump have appointed 3 people in his first term?” Not all Fed governors stay for their whole term. These are some of the most in-demand people in the finance world. A 14-year term represents a huge opportunity cost for them in terms of foregone salary from other alternatives. Many quit before their term is up to take jobs elsewhere.
Let us assume, for the sake of conversation, that all 7 on the board resign before their terms are up and a president can appoint (and get confirmed) all 7 new members who will follow lock-step with whatever he wants. In that (extraordinarily unlikely) scenario, it is possible the president will be able to manipulate monetary policy.
However, as Jason Furman (former CEA head under Obama and current Harvard professor) reminds us, the Federal Reserve is not a central planner, strictly speaking:
President Trump’s focus on a Fed Chair who will slash rates is misguided even on his own terms:
1. The Fed Chair is 1 of 12 votes, a political hack Chair won’t get majority
2. Even if FFR slashed the rates people care about, like mortgage, could go up w/ higher expected inflation
The Federal Reserve only sets a handful of interest rates, and those are limited to rates between banks—the discount rate (the rate at which banks can borrow from the Fed) and the interest rate it pays on bank reserves at the Fed. The Fed tries to influence the Federal Funds Rate (the rate at which banks borrow from each other) through FOMC operations, but they do not set that rate.
The actual rates you and I see are still determined by market factors: risk, inflation, supply, demand, etc. The Fed cannot set interest rates for mortgages, credit cards, and so on. It does not have that power. It tries to influence those rates, yes, but it does not set them.
So, even if a president were able to fully manipulate monetary policy, it is not likely to lead to the outcomes they want. If Federal Reserve interest rates are unjustifiably lowered, commercial banks will anticipate more inflation, leading to higher nominal interest rates charged to consumers. If a president is upset by this (predictable) turn of events, threats of price controls and other “solutions” could follow, making a bad situation even worse.
Concerns over Federal Reserve independence are legitimate, but a lot of things would need to go wrong for it to lose its independence.
READER COMMENTS
David Seltzer
Jul 17 2025 at 12:27pm
Jon: Really good stuff! DJT’s ad hominem attacks on Powell and capricious attempts at manipulating rates gives investors pause. Trump’s golf ball ricocheting in a tile room pronouncements and law suit threats are disconcerting to markets. I don’t think a President has ever attempted to remove a Federal Reserve Chairman. If that’s the case, Trump’s authority to fire Powell hasn’t been tested.
Craig
Jul 17 2025 at 1:19pm
sorry meant to reply up here DS.
David Seltzer
Jul 17 2025 at 2:35pm
“Fed has lost that privilege because it isn’t actually de facto independent and has caused way too much inflation.” Bang on Craig. Google How Nixon bullied Fed Chairman Arthur F Burns to increase money supply in 1972 to get re-elected. If you listen to the tape, Nixon browbeats Burns into submission.
steve
Jul 17 2025 at 12:46pm
If he fires Powell I doubt he stops there and goes on to fire others. Congress wont challenge him and it would have to go to SCOTUS which would not hear the case until next year. Given their current trend of supporting the unitary executive I suspect they would support his actions.
Steve
Jon Murphy
Jul 17 2025 at 1:07pm
To be clear, he can only attempt to fire Powell from the role of chairman. He cannot remove Powell from the Board of Governors. That’s crystal clear.
Craig
Jul 17 2025 at 1:12pm
“DJT’s well deserved attacks on Powell” FTFY 😉 Pot calling the kettle black but JP gotta go.
“capricious attempts at manipulating rates”
Not capricious though because honestly the world’s largest debtor needs lower interest rates. On that account Trump is correct from that specific pov. As for me, I want lower inflation and higher rates but that’s my pov of course.
“gives investors pause. ”
The fiscal situation should give them pause!
“If that’s the case, Trump’s authority to fire Powell hasn’t been tested.”
He probably doesn’t have such authority of course and while I actually DO believe in Fed independence* I also believe the Fed has lost that privilege because it isn’t actually de facto independent and has caused way too much inflation. Throw in some transitory gaslighting and its time to completely abolish the Fed altogether. Indeed one of the problems US faces today is people do not have confidence in American institutions and Federal Reserve is among those whose reputations has been tarnished.
* Fed independence as a course of performance, as an originalist the power over money is specifically delegated TO CONGRESS, not Trump, Federal Reserve should be 100% unequivocally SUBJECT to Congress. Of course I am at the point where I actually think we should get government out of money altogether. Can’t trust any of these people.
Jon Murphy
Jul 17 2025 at 1:28pm
Well, no. Treasury rates are determined in the market. The Fed has little control on those rates. Again, they can try to manipulate the rates my buying treasuries, but ultimately the market determines the rates.
But I doubt Trump is thinking along those lines anyway. He seems to be thinking more about the rates people see in the market.
Craig
Jul 17 2025 at 1:36pm
Its both I have heard him say it:
https://www.usatoday.com/story/money/2025/07/03/trump-fed-rate-cuts-us-debt/84440487007/
“Most recently, he has cited a claim that Fed’s refusal to slash its key rate is costing the federal government hundreds of billions of dollars a year in interest payments on its debt.”
Jon Murphy
Jul 17 2025 at 1:38pm
He really is a child playing with a loaded gun.
Craig
Jul 17 2025 at 1:42pm
No worries the pain from the bullet wound will only prove to be transitory.
David Seltzer
Jul 17 2025 at 2:45pm
Craig wrote; “No worries the pain from the bullet wound will only prove to be transitory.” Only if you assume the bullet didn’t kill you and the wound is superficial.
Craig
Jul 17 2025 at 8:30pm
We seem to inhabit a world where DT shouldn’t fire JP, but JP does deserve to be fired — by someone.
Jon Murphy
Jul 17 2025 at 8:45pm
I strongly disagree. Powell shouldn’t be fired. He’s been quite good, all things considered.
Mactoul
Jul 18 2025 at 12:36am
How the Federal Reserve independence so important that it decides the country’s economic performance and also it doesn’t do all that much?
Jon Murphy
Jul 18 2025 at 5:21am
I’m not quite sure the question you’re asking.
Robert EV
Jul 18 2025 at 4:22pm
It’s a symbol of separation of powers. It’s also a signal that trained economists are in charge of part of the economy, as opposed to populist or special interest politicians.