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 1:32pm
12 USC 242 suggests he would need to show ’cause’ for either.
“The members of the Board shall be ineligible during the time they are in office and for two years thereafter to hold any office, position, or employment in any member bank, except that this restriction shall not apply to a member who has served the full term for which he was appointed. Upon the expiration of the term of any appointive member of the Federal Reserve Board in office on August 23, 1935, the President shall fix the term of the successor to such member at not to exceed fourteen years, as designated by the President at the time of nomination, but in such manner as to provide for the expiration of the term of not more than one member in any two-year period, and thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President. Of the persons thus appointed, 1 shall be designated by the President, by and with the advice and consent of the Senate, to serve as Chairman of the Board for a term of 4 years, and 2 shall be designated by the President, by and with the advice and consent of the Senate, to serve as Vice Chairmen of the Board, each for a term of 4 years, 1 of whom shall serve in the absence of the Chairman, as provided in section 244 of this title, and 1 of whom shall be designated Vice Chairman for Supervision. The Vice Chairman for Supervision shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board, and shall oversee the supervision and regulation of such firms. The Chairman of the Board, subject to its supervision, shall be its active executive officer. Each member of the Board shall within fifteen days after notice of appointment make and subscribe to the oath of office. Upon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified. Any person appointed as a member of the Board after August 23, 1935, shall not be eligible for reappointment as such member after he shall have served a full term of fourteen years.”
Jon Murphy
Jul 19 2025 at 2:30pm
Don’t forget the recent Supreme Court opinion on the matter…
Craig
Jul 19 2025 at 3:51pm
The statute still sets the standard as ‘for cause’ though. The Fed is a special entity, not in the Executive Branch (see distinction with removal of CFPB director), and as such it does have protections from just unilateral/arbitrary personnel decisions (even the less controversial ‘change of administration’ turnover). They did not define what ’cause’ meant. So the issue really is what does ’cause’ mean for purposes of 12 USC 242? Indeed we can create a ridiculous Hollywood fact pattern to illustrate the point better, if Powell and the Board of Governors went to the hospital and started shooting babies, nobody would blink if they were, naturally arrested for the murders, but if Trump terminated them ‘for cause’ that level of misconduct wouldn’t be remotely controversial. Of course if Powell contests the termination, Powell would likely argue that Trump’s stated ’cause’ is insufficient/pretextual. But make no mistake about it, Trump would almost assuredly state some cause.
In the Wilcox case those terminated brought suit and at the trial level they got an order which would have compelled the administration to reinstate them after which the appeals court and the Supreme Court actually stayed, and continued to stay, that order meaning Trump did not have to reinstate them while the case was pending. Procedurally that is important of course even if they ultimately prevail.
Difficult always to predict how cases will be turn out, but procedurally if a theoretical future Powell wrongful termination case goes to court, if it follows Wilcox case procedurally; procedurally, Trump would terminate Powell, Powell would sue and Powell would not be able to compel his reinstatement while the case itself was pending even if we assume that he would ultimately prevail. My suspicion is that even if he prevails he’d be effectively limited to money damages because a rescission of his termination or order to reinstate might not make much sense after passage of time.
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.
Craig
Jul 19 2025 at 9:57am
Listening to Professor Steve Hanke on YT while working he opined: “‘Neither one of them [referring to Trump and Powell] have a good grip on monetary policy at all.'” He then gave me a good chuckle when he said that both would get F’s if they were sitting in his class. 🙂
Andrew_FL
Jul 17 2025 at 4:26pm
Do you believe that when Nixon put political pressure on Arthur Burns, it made no difference to Fed policy? What about when Lyndon Johnson literally shoved Bill Martin around? Fed Chair is just one seat of 12, right?
Jon Murphy
Jul 19 2025 at 2:29pm
Unclear. We’d need to see what influence Burns had on the rest of the FOMC. Although, do note my last two paragraphs
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.
Greg G
Jul 21 2025 at 7:53am
Nice post Jon. This clarified some things I didn’t understand.
Comments are closed.