The Worst Way to Set Monetary Policy?
“The only good central bank is one that can say no to politicians”
– The Economist (1990)
President Trump has made multiple statements about the Federal Reserve and its chair Jerome Powell over the past several weeks, including:
- “[Powell] could do the biggest and best job for our Country by helping to lower Interest Rates and, if he reduced them to the number they should be, 1% to 2%, that ‘numbskull’ would be saving the United States of America up to $1 Trillion Dollars per year.” [June 20].
- “‘Too Late’ at the Fed is a disaster! Europe has had 10 rate cuts, we have had none. Despite him, our Country is doing great. Go for a full point, Rocket Fuel!” [June 6].
- “‘Too late’ Powell must LOWER THE RATE. He is unbelievable!!!” [June 4].
- “there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW. . . . Powell has always been ‘To Late,’ [sic] except when it came to the Election period . . . .” [April 21].
These statements raise at least three important questions: (1) why does President Trump want the Federal Reserve to lower the interest rates it controls; (2) if the Federal Reserve refuses, may President Trump remove Jerome Powell as its chairman; and (3) if not, is it good policy for the Federal Reserve to be “independent” in this manner from elected leaders of the United States? The last question is the most complex and controversial.
1. Why does President Trump want the Federal Reserve to lower interest rates?
The text of the April 21 statement quoted above provides the answer, President Trump fears “a SLOWING of the economy” and believes or hopes that if the Federal Reserve “lowers interest rates, NOW” an economic slowdown will be avoided.
This theory, that lower interest rates encourage greater economic activity, is not unconventional. The idea is that if interest rates and borrowing costs come down, entrepreneurs and business people will be more likely to borrow money to start new businesses or invest in existing ones, consumers will be more likely to borrow for large purchases such as homes or vehicles, and stock and bond prices are more likely to rise. 1 Another reason proffered by President Trump for why interest costs should be lowered, is that doing so would reduce the amount of money the government would have to pay to finance its enormous debt.
However, lowering interest rates carries the risk of heightened inflation, among other distortions to the economy. While Chair Jerome Powell has not responded directly to any of President Trump’s statements attacking him, it is likely that the Fed has not lowered interest rates this year because unemployment is reasonably low, it is concerned with potential new inflation caused by tariff policy (particularly after inflation hit a 40-year high as recently as 2022) and it does not want to appear to bow to political pressure.
If the Federal Reserve does not lower interest rates, President Trump would dearly love to fire Chair Jerome Powell. Hence, question #2?
2. If the Federal Reserve refuses to take the actions President Trump wants, may President Trump remove Jerome Powell as its Chair?
This issue — whether Presidents have the unfettered power to terminate heads of “independent agencies” — is surprisingly complex. The Supreme Court first addressed it in a 1926 decision, Myers v. United States, a case that has since spawned a host of precedents.
Nevertheless, it is highly unlikely that the Supreme Court would hold that any President has the right to fire at-will and without proof of wrongdoing the Chair of the Federal Reserve. The basis for this conclusion is a May 22, 2025, Supreme Court interim ruling in Trump v. Wilcox that denied an order reinstating two labor commissioners who President Trump had removed without cause (“interim” meaning the commissioners had sought reinstatement while the underlying case against the removals proceeded before lower courts). In this 6-3 two-page decision denying the reinstatement request, the majority took the trouble of clarifying that the Federal Reserve would be placed in an entirely different category than other administrative agencies:
[The removed commissioners] contend that arguments in this case necessarily implicate the constitutionality of for-cause removal protections for members of the Federal Reserve’s Board of Governors or other members of the Federal Open Market Committee. We disagree. The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States. (internal citations deleted).
The three dissenting Justices would have reinstated the two commissioners while the litigation proceeded, and accused the majority of “the creation of a bespoke Federal Reserve exception” protecting only the Federal Reserve Governors from at-will presidential termination.
Accordingly, at present all 9 justices of the Supreme Court have indicated that the Federal Reserve Chair cannot be fired at-will by the President. This leads to our final question:
3. Is it good policy for the Fed to be “independent” from nationally elected leaders?
Most economists answer this question “yes.” Harvard Professor Kenneth Rogoff, co-author of the 2009 bestseller This Time is Different, in his most recent book, Our Dollar, Your Problem, refers to “Central Bank Independence” as “The Bulwark of Currency Dominance.” He means that “trust in the Federal Reserve’s commitment to keeping inflation (reasonably) stable is the single most important bulwark that stands between global economic stability and a return to the macroeconomic stone ages.”
While Rogoff is seen to tend more to the conservative side as an economist, tending more to the liberal side is former New York Times columnist Paul Krugman, who in August 2024 wrote a column titled “Why Presidents Should Keep Their Hands off the Fed.” Krugman argued that “political leaders have found that, as a practical matter, tying their own hands by placing control of the money supply in the hands of quasi-independent technocrats is the best way to protect themselves from temptation.”
In short, if elected politicians can set interest rates and control the money supply, severe or destabilizing inflation is a very possible if not likely result. An Independent Central Bank is the best way to address this possibility.
This logic is compelling and, as stated, the consensus position, but it has been subject to reasoned criticism by thinkers who are not cranks or conspiracy theorists. An effective current advocate is Alex Pollock, a former banker and former researcher within the US Department of Treasury, whose most compelling argument is based on political not economic theory.
The Federal Reserve is “one of the most prestigious and important institutions in the world and arguably the most important part of the U.S. government, next to the Presidency.” It has enormous power, which it exercises through “central planning and price fixing [setting interest rates] by committee.” Should any part of a democratic government, “let alone one with such immense power and riskiness, . . . be free of checks and balances and free of serious accountability”? Pollock’s answer is “no”, although even he does not appear to advocate for the right of the President to unilaterally fire Federal Reserve policy makers. Instead, in his book Finance and Philosophy he proposes that a new Committee in Congress be created and given oversight responsibility, but he appears to sidestep the crucial question of whether and when elected leaders should have the power to remove Federal Reserve policy makers.
Winston Churchill famously remarked that “Democracy is the worst form of government, except for all the others that have been tried from time to time.” The same may be true here, that an Independent Central Bank is the worst way of setting monetary policy, except for all the others that have been tried.
