Loss of Fed independence may be a matter of time
Orchestrated attack of independent economic and financial agencies
The Trump administration is systematically undermining the credibility of its central bank and statistics agencies. Aspersions have been cast over the Federal Open Market Committee’s (FOMC) interest rate decisions and the Bureau of Labour Statistics’ (BLS) data releases, with allegations that both institutions are incompetent and politically motivated. These attacks are usually associated with authoritarian regimes that obscure economic and social realities, not with a country whose bond yields are the risk-free rate benchmarks against which global interest rates are measured. Political interference in monetary policy is not unprecedent as evidenced in the 1970’s, during Nixon’s presidency.
In a July 2025 interview, Trump claimed that the US economy is so strong it is “blowing through everything … setting records at levels nobody has ever seen before”. Despite asserting that growth was booming, he called Powell a “numbskull” for keeping rates too high and accused him of having a political agenda – trying to supress growth to discredit him. Trump further stated that the Fed “don’t do anything … they show up for half a day and make a little speech … It’s affecting people who want to buy houses and that shouldn’t happen”. He called for rates to be lowered to 1.0%, arguing this would allow the US to “lead the world”1. In the same interview, Scott Bessent, the US Secretary of the Treasury called for the Fed to “cut rates right now”.
In mid-August Bill Pulte, the Trump-appointed director of Federal Housing, publicly criticised Powell and called for his resignation. Pulte also sent two criminal referral letters to the Department of Justice, alleging that Fed Board Governor Lisa Cook was guilty of mortgage fraud. A week later, during the Jackson Hole Economic Policy Symposium, Trump posted on social media that he had fired Lisa Cook. The announcement was made without an investigation, evidence or due process, in defiance of the long-standing legal principles that protect Fed officials.
Cook has refused to resign, and her lawyers have argued in the Supreme Court that if Trump was successful in his attempts to fire her, it would “transform the Federal Reserve into a body subservient to the president’s will”. Notably Governor Kugler, who resigned from the Board in August after less than two years, was also accused of mortgage fraud. According to CNBC, Kugler declined to comment regarding any pressure to resign from the Fed.
The structure of the Federal Reserve System (the Fed)
To understand the potential magnitude of what is unfolding, it is necessary to sift through some of the detail of the Federal Reserve System. The Fed comprises three entities: the Board of Governors (the Board); twelve Regional Federal Reserve Banks (the Reserve Banks); and the Federal Open Market Committee (FOMC).
The Board of Governors is a government agency consisting of the Fed Chair (currently Jerome Powell) and six Governors, who are nominated by the president, confirmed by the Senate and accountable to Congress. Members serve 14-year terms, designed to insulate them from political interference. The Board chair and two vice chairs are nominated by the president for four-year terms, which can be renewed.
The twelve regional Reserve Banks are overseen by the Board. Reserve Bank presidents, who sit on the FOMC, are selected by their respective private-sector boards of directors, subject to Board approval. Reserve Bank presidents serve five-year terms which are typically renewed.
The FOMC is an independent entity consisting of 19 members – the seven Governors and the presidents of the regional Reserve Banks. The FOMC meets at least eight times annually to set interest rates. There are twelve voting members of the FOMC consisting of the Board of Governors plus five of the twelve Reserve Bank presidents. Of these five presidents, the New York Fed always gets a vote while the other four votes rotate on an annual basis.
Chart 1: Structure of the Federal Reserve System
Source: Federal Reserve Banks
Why the urgency to replace Powell and Cook?
For the Trump administration to control interest rates, it must secure the votes of seven of the twelve voting members of the FOMC. To achieve this, the administration must commandeer a majority on the Board of Governors.
Although the US President and Senate appoint the seven Board members, either when their 14-year terms expire or upon early resignation, they do not have the power to appoint the presidents of the regional Reserve Banks. However, because these appointments require Board approval, controlling the Board could enable Trump to influence Reserve Bank president appointments, the FOMC, and ultimately, the Fed.
A majority on the Board requires the loyalty of four of its seven members. Trump has already appointed three: Michelle Bowman, Chris Waller and Stephen Miran. Miran, who has openly criticised the Fed, replaced Governor Kugler and will serve until the end of January 2026. Trump will be responsible for appointing Miran’s replacement with a 14-year board seat. Although Bowman and Waller were nominated by Trump, it is not yet evident whether they will break with conventional monetary policy conduct to cut rates to 1.0% as demanded by Trump.
To install a fourth appointee, Trump is targeting Jerome Powell and Lisa Cook for removal. Powell’s term as Chair ends in May next year, however his Board seat ends in January 2028. If Powell resigns from the Board when his Chairmanship ends, Trump will be able to appoint a fourth member in May 2026. This may be why Powell has not yet declared whether he will stay when his chairmanship ends.
But selecting a Board majority by May 2026 may be too late for President Trump. Fatefully, all twelve of the current Reserve Bank presidents’ five-year terms come to an end in February 2026 and their reconfirmation requires the backing of the Board. If the Supreme court rules in favour of Trump and Cook is removed before February, it could allow a Trump-loyalist Board to block the reappointment of all twelve regional presidents at once. Installing a majority on the FOMC becomes more difficult for Trump if Reserve Bank presidents must be dismissed one at a time.
How to fire a Federal Reserve Bank president
To be clear, the dismissal of a Reserve Bank president would be unprecedent and as such there is still uncertainty about the constitutionality of the process. According to the Supreme Court’s recent opinion, a member of the Board of Governors can only be dismissed by the president of the US and dismissal must be “for cause”. It is unclear whether the same protection is given to Reserve Bank presidents. Worryingly, the Federal Reserve Act states that the Board of Governors has the authority “to suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Board of Governors of the Federal Reserve System to the removed officer or director and to said bank.” In addition, a 2019 Opinion by the Justice Department (which has not yet been tested in court) states that the Fed Board of Governors has the authority to remove a Fed Bank president “at will”.
It is a matter of time before the Fed loses independence?
If Trump appoints a majority to the Board before February 2026, he could theoretically appoint all twelve of the Reserve Bank presidents by the end of March.
In a scenario where the February deadline is missed, but it is confirmed that the Board has the authority to dismiss Reserve Bank presidents “at will”, Trump may gain control of the FOMC and the Fed more broadly once a majority of his appointees are in place. As outlined above, if Cook remains on the Board this may take until Powell’s term ends in January 2028.
If it is deemed unconstitutional for the Board to dismiss a Reserve Bank president “without cause”, a majority of Trump-appointed Board members could still give the US President substantial leverage over regional Reserve Banks. First, what constitutes “for cause” is unclear, opening the door to the possibility that a Bank president could be dismissed for political reasons.
Another source of leverage is the Board’s budgetary control over regional Banks. The willingness to use that control to influence institutions should not be in doubt after the Department of Government Efficiency (DOGE) implemented cost cutting measures throughout the Federal government.
Implications of the recent machinations
The Fed’s credibility and independence is already in question. Regardless of the outcome of Cook’s court case, the systematic attack on the Fed, by intimidating and threatening its members, has already politicised its decisions. If the FOMC keeps rates unchanged there is suspicion that it is asserting its independence, and if it cuts there will be suspicion that it is giving into the demands of the state.
The loss of Fed credibility would likely increase US borrowing costs, as investors are less able to anticipate market outcomes in an increasingly uncertain inflationary and policy environment. Cutting rates to spur inflation would also likely lead to higher longer-term bond yields, steepening the yield curve.
The loss of Fed credibility coincides with rising geopolitical tension, and the erosion of the US’s military power to enforce co-operation from those nations that the US has targeted with higher tariffs. The US’s position as a global super-power is being tested and countries are forming new alliances (e.g. Russia, China, South Korea, India and Brazil) in response to US isolationism. As purchasers of US Treasuries, these alliances have the potential to put pressure on US assets in retaliation. US bonds could risk losing their risk-free status and accumulation of dollar reserves is already in decline.
Perhaps more worrying than taking control over interest rate decisions is a scenario that would allow the Trump administration near complete control over the entire Federal Reserve System, which has more power than setting rates. The Fed determines the money supply and decides which institutions can access the financial system.
Under Section 13(3) of the Federal Reserve Act, the Fed has the authority lend money to “any individual, partnership, or corporation” during “unusual or exigent circumstances.” This provision was used during the 2008 financial crisis to lend to both financial and non-financial institutions. During the COVID pandemic, the Fed’s scope of its lending expanded to include small businesses, nonprofits, and even city governments.
Monitoring the risk of Fed capture
While the potential capture of the Fed by the Trump administration is not a foregone conclusion and relies on a confluence of events, it is not a risk that should be underestimated and seems not to be priced into the markets. Perhaps this is because it is difficult to weigh and quantify the probabilities associated with the myriad of outcomes. It is also, arguably, one of the biggest event risks facing emerging markets.
We draw the reader’s attention to the precedent set by President Nixon. According to a paper by the St. Louis Federal Reserve Bank (How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes, 2006), “President Nixon pressured Burns, both directly and indirectly through Office of Management and Budget Director George Shultz, to engage in expansionary monetary policies prior to the 1972 election… Richard Nixon demanded and Arthur Burns supplied an expansionary monetary policy and a growing economy in the run-up to the 1972 election…In 1972, real GDP grew 7.7 percent and certainly helped Nixon in the election.”
The excessive demand stimulation from accommodative rates triggered an inflationary boom-bust cycle that took nearly a decade to resolve. The gradual increase in inflation gained momentum leading to depression and unemployment. It was not until Paul Volcker became chairman in 1979, raising rates to over 15%, inducing recessions in 1980 and 1982 during which unemployment rose to 10% that inflation was finally brought under control.
Reference https://www.youtube.com/watch?v=yBEwtlbC6hg
