With Trump 2.0, markets and the media knew they would get their fair share of double-takes. For me, the image that springs to mind the most was the moment in July when the President of the United States showed up on the doorstep of the Fed, literally. Armed with a disputed list of costs for Fed building renovations, President Trump said that “generally” speaking he would fire a project manager who had gone over budget. The Fed’s Powell, looking visibly uncomfortable, had already provided a breakdown explaining that the project was on track, and he highlighted that Trump had included in his costings a building which was already complete. The Chairman of the Federal Reserve and the president stood stiffly, side-by-side, in matching hard hats, bickering on a building site, for all the world to see. Trump’s visit to the Fed was only the fourth in U.S. history—the tradition is that the credibility of the central bank and the White House are both strengthened if neither attempts to interfere with the other. The image summed up the conversations (off the record and, in recent months, increasingly nervously) I regularly have with sources—either within the Fed or at agencies working closely with the financial institution. In my catch-ups with these 10 or so people since January, their mood has shifted. Early on, there was optimism that the focus of politicians would pass (as it so often does). But as the months rolled by, they mentally battened down their hatches against an onslaught of insults, scrutiny, and unprecedented criticism.
In the run-up to the election, Trump claimed Powell acted politically by lowering interest rates to help President Biden (an insult, given the legally mandated autonomy of the organization). Vice president JD Vance lobbied for more political control over the base interest rate.
While some economists later echoed Trump in saying the Federal Open Market Committee (FOMC) should cut rates, the public outpouring of Trump’s fury was extraordinary: Trump called him “Too Late Powell,” a “stubborn mule,” a “major loser,” and a “stupid person.”
Wall Street grew uncomfortable with the attacks. Even if it wanted to see rate cuts, it didn’t want to see the central bank’s independence threatened. When Trump pulled back on the notion of firing Powell, he instead focused on other members of the FOMC. In September, he attempted to oust Fed Governor Lisa Cook via social media, alleging she made false statements on a mortgage application. She denies that and has taken her case to the Supreme Court. Hearings begin in January.
Other autonomous agencies got the message: If Trump is willing to take on the Fed, they might be next. “How much can truly change under a single administration?” I asked one source. “Three years is a long time yet,” was the response.
The January question
Since January, many federal employees inside and outside the Fed have quietly decided that discretion is the better part of valor. To the relief of Wall Street, the Fed’s most prominent figures haven’t gone to ground entirely.
Outside of monetary policy leaders have publicly stuck to the script when it comes to political questions. Time and again, Powell insisted that base rate decisions are made exclusively and entirely on data pertaining to the economy. On the elephant in the room that is January’s court hearings over the firing of Cook, Powell said it would be “inappropriate” to comment.
While the temperature has dropped for now, sources say, they’re preparing for the mercury to start rising again early next year. The reasoning that an independent Fed leads to better economic outcomes is widely accepted. But if Trump succeeds in ousting Cook, then the Fed’s autonomy looks less secure—potentially leading to inflationary sentiment.
Analysts’ concerns over the Fed’s independence don’t descend as low as comparisons to President Nixon and Arthur Burns however, when an alignment on monetary policy between the White House and the Fed plunged the economy into a crisis.
Economists more widely believe that there are too many defenders of independence—and too much scrutiny from the markets—to allow politicians to attempt to fundamentally alter the trajectory of the Fed, especially if Jerome Powell sticks around as a governor.
Selective silence is a tactic on which it seems everyone, at last, can agree. Critics argue that the Federal Open Market Committee (FOMC)—with its mysterious dot-plots and the breadcrumbs its members occasionally drop into speeches—engages the attention of Wall Street a little too much. Treasury Secretary Scott Bessent has been lobbying for a “backseat” Federal Reserve, something insiders will be only too happy to oblige.
On the other hand, the Federal Reserve system is mandated to answer to Congress and, by extension, the American public. In an era of economic volatility, with business leaders and consumers alike unsure of the path forward, a void of insight from key decision-makers could be damaging and frustrating.
There’s also been a delicate balance to strike between pushing back on claims about bias within the Fed and reminding the public that the Fed is focused mainly on, and is guided by, its mandate.
The next Fed chairman
Another awkward question is who’s actually in charge. Secretary Bessent has made it clear that in the search for a new Federal Reserve leader, he wants to appoint a “shadow chair”, someone to be the true power at the Fed while Powell is increasingly overlooked as he nears the end of his term in May.
It was not a popular idea, but the White House has proceeded with a very public recruitment process ever since. Potentially impacted parties are keeping an eye on frontrunners, they said, without becoming overly invested in outcomes that may never come to pass.
One concern is that the broadcast nature of the selection process means pressure is already piling onto the shoulders of the would-be nominee, who must wrangle expectations without having accumulated much real influence within the central bank.
Wall Street is also preparing for some early hiccups. Until the past few meetings, Powell’s run had been one of steady consensus. As UBS’s Paul Donovan said in a note to clients this week: “What is perhaps more interesting today is the extent of division within the Federal Reserve. This is potentially storing up trouble for Powell’s successor as Fed Chair. A Fed that is prepared to dissent under Powell may be more inclined to dissent under a Fed chair who commands less respect in the institution, and the wider financial markets.”
Whatever the creases that will need to be ironed out under a new Federal regime, Trump’s cabinet seems keen for it to happen behind closed doors. For federal staffers who want to crack on without the weight of the White House breathing down their necks, the diversion of that attention can’t come soon enough.
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