Why Trump Cannot Win Against the Federal Reserve
Replacing the Chair is not enough to change monetary policy, as Trump would like — namely, to lower interest rates to boost economic growth. A commentary by Lorenzo Bini Smaghi
Among the many battles declared by the Trump Administration in its first 100 days — following those against tariffs, immigrants, law firms, universities, judges, and regulatory authorities — the most important so far ended with an armistice after just 48 hours, much to the relief of financial markets.
The attempt to remove the Chair of the Federal Reserve, the U.S. central bank, and appoint a trusted ally in his place has been abandoned, at least for now.
This, too, would have been a serious mistake, for several reasons.
First, the attempt to dismiss Jay Powell would most likely have failed, because the Federal Reserve’s independent statute prevents the removal of a Chair appointed for four years.
Trump may have hoped for a favourable opinion from the Supreme Court, but recent rulings against him likely discouraged further action — particularly since Powell had openly declared his intention to resist, hiring private law firms for support.
Powell also has a significant weapon at his disposal: even if removed as Chair, he could remain on the Federal Reserve Board as an ordinary member until his term expires in January 2028, long after the end of the current presidential mandate.
As former Vice Chair Michael Barr has already demonstrated, this would limit the Administration’s room for manoeuvre in reshaping the central bank’s leadership.
Second, the Federal Reserve, like all other central banks, is a collegial body that makes decisions by majority vote. The Chair organises meetings and acts as the spokesperson, but cannot unilaterally determine policy.
Changing the Chair alone would not be enough to change monetary policy, as Trump desires: that is, to lower interest rates in order to accelerate economic growth.
In his criticisms of Powell, Trump has even gone so far as to praise the European Central Bank, which over the past ten months has cut interest rates by 175 basis points, compared to just 100 basis points by the Fed.
Third, while the Federal Reserve differs from other central banks — such as the ECB, the Bank of England, or the Bank of Japan — in pursuing a dual mandate of price stability and full employment, it cannot adopt monetary policies that promote only one objective at the expense of the other.
In the current environment, characterised by historically low unemployment, a more expansionary monetary policy would risk reigniting inflation well above 2%. This could, in turn, push up long-term interest rates and increase the burden on public debt.
Any rate cut must therefore be consistent, even during an economic slowdown, with anchoring inflation expectations around 2%, in order to avoid upward pressure on long-term yields.
The Federal Reserve’s recent reluctance to cut interest rates stems from the need to assess the inflationary impact of the Administration’s policies.
Fourth, the Federal Reserve will eventually lower rates, especially if the economic slowdown intensifies. It is only a matter of months. Markets had already been anticipating further cuts starting in the summer. Pressuring the Fed for a few months’ gain risks being counterproductive.
Finally, economic history offers a clear warning. In 1970, President Richard Nixon appointed Arthur Burns as Chair of the Federal Reserve, and political interference led to an excessively loose monetary policy that fuelled inflation for many years.
No future Chair — not even one appointed by Trump — would want to be remembered as a second Arthur Burns.
The enthusiastic market reaction to Trump’s decision not to replace Powell confirms that this was a misguided battle. The rebound was even stronger than expected, possibly reflecting the belief that, from now on, the President will be more attentive to market reactions when making political decisions.
Paradoxically, however, this could further destabilise financial markets. If the President is seen as ready to reverse course whenever markets fall, their reaction could initially become more gradual and cautious, in anticipation of a rapid change in direction.
This would mean that course corrections would be delayed — and the consequences of policy mistakes would become more lasting.
An Italian version of this commentary was published on the daily newspaper Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
