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The role of the U.S. Federal Reserve Chair carries immense power and pressure. America’s central bank is meant to set monetary policy free from short-term political interests, yet the Fed’s leadership is appointed by the President. This tension is coming to a head as Jerome Powell’s second term as Fed Chair winds down in May 2026. President Donald Trump, who has openly clashed with Powell over high interest rates, is widely expected to choose a new chair rather than reappoint him. The situation highlights a core conflict of interest: the Fed’s mandate to act independently vs. a President’s desire to influence policy for political gain. ABSI this week cautions on the weakening of Fed independence. 

The Federal Reserve’s independence has long been considered crucial for stable economic management. There is ample evidence that when central banks are insulated from political meddling, inflation stays lower without any harm to employment. The Fed’s structure attempts to safeguard this independence with Board Governors serving 14-year terms and the Chair a 4-year renewable term, deliberately outlasting election cycles. In practice, however, Presidents often try to sway the Fed for their own political gain. 

President Trump’s very public feud with Jerome Powell underscores the current threat to Fed independence. Since returning to the White House, Trump has been relentless in demanding rate cuts and, at one point, pledging to “demand that interest rates drop immediately”. Trump derides Powell as too slow to lower borrowing costs (calling him “Mr. Too Late”) and even mused about firing him, though by law, a Fed Chair can only be removed for cause. This unprecedented pressure from a sitting president has taken the Fed into uncomfortable territory. Powell, for his part, has repeatedly insisted that the Fed will not be swayed by politics, emphasising that decisions are driven by economic data, not election calendars.

So far, the Fed has resisted cutting interest rates in the face of Trump’s calls and with good reason. Inflation, while down from its post-pandemic peak above 9%, remains stuck above the Fed’s 2% target. In fact, recent data showed core price growth unexpectedly accelerating again, a sign that Trump’s tariff policies may be rekindling inflationary pressures.

United States Inflation Rate

Source: Trading Economics

As a result, tensions have escalated as Trump tests the boundaries of the Fed’s independence. Beyond verbal assaults, the White House has actively sought to reshape the Fed’s Board of Governors to be more compliant. In August, Trump seized on an unexpected resignation of a Fed Governor to nominate a loyalist replacement and “put his imprint” on the Board. He also demanded the resignation of another sitting Governor (Lisa Cook) over ethics allegations. These maneuvers blur the lines between the ostensibly independent central bank and partisan politics. Powell’s steadfastness so far affirms the Fed’s traditional stance, but with his term ending, Trump now has the opportunity to install a new leader more sympathetic to his wishes, raising concerns about the future of policy free from political interference.

Jerome Powell’s term as Fed Chair ends in May 2026, and given his fraught relationship with President Trump, few expect him to be reappointed for a third term. Instead, Trump has made clear he is actively searching for Powell’s successor. Treasury Secretary Scott Bessent (tasked with vetting candidates) has reportedly been interviewing a slate of up to 11 contenders for the job, ranging from current Fed officials to former insiders and Wall Street figures.

This dynamic has created a subtle but troubling incentive for Fed officials with ambitions. Several candidates have seemingly positioned themselves to please Trump’s White House by advocating lower interest rates in public statements and even formal Fed votes. For example, Governor Christopher Waller and Vice Chair Michelle Bowman, both Trump-appointed Fed officials, broke with Powell in a notably rare double-dissent at the July FOMC meeting, voting in favour of an immediate rate cut. Waller and Bowman argued that the Fed was being too timid and should cut rates to support a weakening labour market, echoing the President’s push. Such public dissents align neatly with Trump’s demands, and they did not go unnoticed in the Oval Office. The worry is that would-be Fed Chairs are auditioning for the role by espousing dovish views that match the President’s short-term political interests.

FOMC Dot Plot - June 2025

Source: Federal Reserve

If President Trump installs a Fed Chair overly beholden to political demands, the consequences could be felt for years. The most immediate outcome of a dovish, pro-Trump appointment would likely be significantly lower interest rates in the short run. In the near term, easier money would boost growth and probably please stock investors. But the long-run dangers of an overly compliant Fed are profound. Slashing rates while inflation is still above target risks unleashing a new inflationary wave. The nightmare scenario is a return to stagflation, where the economy stagnates but prices keep rising.

The Fed’s credibility itself is a critical asset. It has been painstakingly built over decades by resisting short-term political impulses (as Paul Volcker did in the 1980s, for example, by choking off inflation despite political heat). If the next Fed Chair is seen as a presidential yes-man, that credibility could evaporate. The result may be that inflation accelerates, forcing the Fed into a corner: either allow prices to spiral (hurting consumers and savers) or slam on the brakes later with even sharper rate hikes that could induce a recession. In other words, caving in to political pressure now could simply set the stage for more economic pain later, repeating the very cycle the Fed’s independence was designed to prevent

Ultimately, the importance of an independent monetary policy board cannot be overstated. A central bank free from partisan influence is more likely to make the tough calls needed to ensure long-term stability. In the months ahead, the world will be watching whether America’s central bank can maintain the delicate but vital balance between independence and accountability, or whether that balance tilts decisively under the weight of political pressure.

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