Now that the Federal Reserve has cut interest rates in its final meeting of the year, two enormously important, intertwined issues are unresolved for 2026: Who will be the next Fed chair, and will the Fed continue to be independent?
Amid the Trump administration’s repeated public attacks on the Fed, we often take the central bank’s independence for granted. But it was hard-won.
The big breakthrough took place in 1951. For decades before then, the Fed functioned, to a large extent, as an adjunct of the Treasury and the White House — and during World War II it was a passive enabler of the Roosevelt and Truman administrations’ policies, keeping rates artificially low to finance the deficit spending of the war. By February 1951, inflation had soared above 20 percent, a disastrous development that the Fed blamed on the executive branch.
After major political battles culminated in an agreement, now known as the Treasury-Fed accord in March 1951, the Fed ensured that it would no longer be required to do the bidding of the Treasury and White House, but would operate according to its own lights, as an independent central bank. It could raise short-term interest rates to curb inflation if it deemed that politically unpopular act necessary, and it would no longer be required to hold bond market rates artificially low.
That struggle for control of U.S. monetary policy never entirely ended, however. It is being fought for again now in a series of contentious public battles, with immense implications for the cost of living, the dollar and the risks that must be borne by long-term investors.
Echoes of the Past
President Trump said he would designate a nominee next month to replace Jerome H. Powell, the beleaguered Fed chair, who has not lowered interest rates as much as the president would desire. Candidate interviews are underway, but Kevin A. Hassett, the director of the White House economic council, is said to be the front-runner. He has gone out of his way to support Mr. Trump’s position on interest rates and much else.
But he told The Wall Street Journal recently that if he were the Fed chair he would think for himself and “just do the right thing.” Mr. Hassett added that he would not lower rates if ordered by the president to do so at an inopportune time — in effect, asserting a degree of Fed independence.
Separately, the Supreme Court is expected to weigh in on the Trump administration’s efforts to replace Lisa Cook as a Fed governor and on whether the president has the right to fire Mr. Powell and control the Fed.
Why does any of this matter? While close cooperation between the Fed and the Treasury is often essential, economists nearly universally agree that central banks work best when they are not beholden to politicians. “The principle that a central bank, charged with controlling inflation, should be independent from the government is unassailable,” is how Janet Yellen put it in 2009 when she was still the president of the Federal Reserve Bank of San Francisco. She went on to become Fed chair and then Treasury secretary, and her views on this point never changed.
The Trump administration has not always adhered to this principle. What I found startling, after reading a little history, is how much the Fed’s problems with the Trump administration echo those of the late 1940s and early 1950s under President Harry S. Truman, a Democrat.
Ex-Chairman Turned Rebel
The Fed’s main building — which President Trump says is being wastefully renovated under the leadership of Mr. Powell — was named after a main protagonist in the Fed’s struggles for independence, Marriner S. Eccles. What’s fascinating is that Mr. Eccles lost his job as Fed chair, but stayed on as Fed governor and became the point man in the fight with the White House.
Stepping down as chairman but remaining a governor is a move that Mr. Powell could, theoretically, make next year, but he declined on Wednesday to say whether he would do so. While his term as chair expires in May, his stint as a Fed governor could continue until January 2028. Deutsche Bank invoked the Eccles example in a recent research note: “Could Jerome Powell follow the Marriner Eccles precedent?”
“Given President Trump’s past actions and stated desire for greater influence over Fed policy,” Peter Hooper and Matthew Luzzetti, authors of the note, pointed out, “Jerome Powell might view remaining on the board of governors as crucial for safeguarding the Fed’s independence by providing stability and continuity amidst potential political pressure.”
Mr. Eccles provided more than stability and continuity. As a Fed governor in late 1950 and early 1951, he played a much more aggressive role in the fight with the administration than the chair at the time, Thomas B. McCabe.
Mr. Eccles went so far as to leak memos to The New York Times and The Washington Post — one provided grist for a Page 1 article in The Times on Feb. 4, 1951 — revealing the pressure and sharp-elbowed tactics being used against the Fed by the White House and Treasury. “TRUMAN IS DISPUTED BY RESERVE BOARD,” the Times headline read.
Accompanying the piece was a lengthy Fed memo, approved by the Fed board, describing what actually happened in a White House meeting between the Fed and the Truman administration. The memo made it clear that Truman was attempting to force the Fed to go along with cheap-money monetary policies with which it did not agree. This contradicted the administration’s public assurances that the Fed and the White House were on the same page.
Openly opposing the president and the Treasury was a dangerous gambit. The Fed’s resistance was successful, in no small part because of the geopolitical pressure being placed on the Truman administration at virtually the same time by North Korean and Chinese troops.
The Korean War was underway, and U.S. forces, operating under the aegis of the United Nations, were losing ground. Gen. Douglas MacArthur wanted to use nuclear weapons against China, which the Truman administration was considering.
In a news conference in November 1950, and in a subsequent White House statement, President Truman said he would not rule out the use of nuclear weapons.
Congress held hearings on the military crisis. In the middle of all of this, the administration yielded to the Fed’s insistence that it be set free to curb inflation, which, the Fed said, was being fueled by military spending and the Treasury’s insistence on low interest rates to finance the U.S. debt.
The Background
The Fed had gone along with the Roosevelt administration’s demands to engage in debt financing — now known as a period of financial repression — during World War II. But the central bank grew restive in the early postwar period, as deficit spending, low interest rates and mounting debt helped to fuel inflation.
The outbreak of the Korean War — and the national security emergency that became the long-running Cold War, with the Soviet Union replacing Nazi Germany as the main adversary of the United States — worsened the United States’ economic problems. The Truman administration expected the Fed to promote U.S. national security interests, while the Fed insisted on safeguarding the value of the dollar, which, it said, had been put at risk by the administration policy.
These conflicts over inflation, Fed independence and U.S. foreign policy undermined the popularity of President Truman. He didn’t run for re-election in 1952, and the Democratic candidate, Adlai E. Stevenson, lost in a landslide to Gen. Dwight D. Eisenhower. Republicans gained control of the White House and both houses of Congress for the first time since 1928. (Democrats regained control of Congress in the midterms of 1954.)
I’ve written before that presidents continued to pressure the Fed, sometimes with great success. For example, the Watergate tapes revealed the acquiescence of Arthur F. Burns, the Fed chair, to President Richard M. Nixon’s badgering in 1971 and 1972. The Fed lowered interest rates as ordered, and inflation surged, reaching 20 percent in 1980.
Paul A. Volcker, who became the Fed chair in 1980, suppressed inflation by raising interest rates as high as 19 percent. He resisted pressure from the Reagan administration to lower rates in time for the election of 1984. Mr. Powell cited the Volcker example in 2022, when inflation soared again, and promised to do whatever it took to get price increases under control. He is still upholding that vow.
By now, Fed independence is commonly thought of as a tradition, but it isn’t immutable. In 2026, we may find whether the Fed’s ability to function as it sees fit, for better and worse, will survive the Trump administration’s disregard for this, and many other, U.S. traditions.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
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