A Test of Independence: The Latest Clash Between the White House and The Fed

Thank you for joining us this Saturday morning.

In mid-January, Federal Reserve Chairman Jerome Powell posted a stunning video. In a two-minute straight-to-camera address, Powell revealed that “the Department of Justice served the Federal Reserve with grand jury subpoenas threatening a criminal indictment related to my testimony to the Senate Banking Committee last June.”

The testimony in question, Powell explained, concerned the expensive renovation project underway at the Federal Reserve’s headquarters.

“These are pretexts,” Powell said. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.”

The long-running feud between Powell and President Donald Trump appeared to reach its apex, threatening the independence of the central bank and, by extension, the integrity of American monetary policy.

Today, we dive into some history behind the oft-strained relations between presidents and Fed chairs, the disagreement underlying this particular feud, and what’s happened since Powell posted his remarkable video. 

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According to lore (accounts differ), President Lyndon Johnson in the summer of 1965 “summoned William McChesney Martin, the Fed chairman, to his Texas ranch and physically shoved him around his living room, yelling in his face, ‘Boys are dying in Vietnam, and Bill Martin doesn’t care.’” 

Johnson was enraged that Martin spearheaded a vote of the Federal Reserve’s Board of Governors to raise the discount rate because of inflation concerns. The president, famous for his intimidation tactics, did not like the economic cooling an interest rate hike would likely entail. 

His frustration – if not his potential assault on the chairman – is typical of the relationship between presidents and Fed chairs. The White House cares most about short-term economic trends because they help determine short-term political trends. The Fed, by contrast, focuses on medium-term economic health. The Fed’s governors are appointed to staggered multi-year terms precisely to insulate their decisions from political pressure.

This has long been both a political friction point and the foundation for sound monetary policy for the world’s reserve currency. Other presidents, from Nixon to Bush, have similarly tried to influence Fed decision-making. It’s not unusual or “unprecedented.” It’s a natural byproduct of the existing structure.

The feuds between presidents and Fed chairs almost always center on interest rate hikes, and the battle between President Donald Trump and current Fed Chair Jerome Powell is no different. Trump would like to see the Fed cut interest rates further. In the short term, doing so may bring down mortgage rates, juice the economy, and prompt stock market gains. But it also risks causing inflation to spike again, which could outweigh all of the short-term benefits. 

Consistent with his brand, Trump has pressed his case to the extreme. (Former New York Times columnist David Brooks said in an interview this week, “It’s like going to a doctor with acne and the doctor says, ‘You know what will fix acne? Decapitation.’ That’s Trump.”)

The president has publicly excoriated Powell’s performance and intellect, questioned his ethics, and compared him to a “golfer who can’t putt.”

Powell, for his part, refuses to accommodate the president’s demands, arguing that the Fed will make interest rate decisions based solely on economic data. 

Trump could try to fire Powell, and has threatened to do so, but the law stipulates that it must be “for cause.” How courts would decide the question is uncertain. 

Trump, then, chose to simply wait out Powell’s tenure. His term as Fed chair ends in May, and Trump nominated a replacement, Kevin Warsh, in January. 

Warsh previously served as a Fed governor in the 2000s and is a known figure in financial circles. But, according to The Economist, Warsh “seems a peculiar choice for a president on a crusade to lower interest rates. He made his name as a ferocious inflation hawk during his stint as Fed governor from 2006 to 2011.”

Warsh has changed his outlook since then. “Mr. Warsh explains this change of heart by pointing to the deregulatory genius of the president’s policymaking and the prospect of a productivity-enhancing boom in artificial intelligence. These forces, he argues, will wipe away whatever inflation lingers in the economy. The Fed need not fret and can happily lower rates to juice things.”

Whatever Warsh’s philosophy, though, he wouldn’t have complete say over Fed policy: the committee that votes on interest rates has 12 people on it. And though Powell’s term as chair ends in May, his term as a voting governor continues through 2027. (Warsh would likely replace Stephen Miran on the board of governors, whose term expired earlier this year.)

What’s more, Warsh right now has no path to even joining the Fed. North Carolina Senator Thom Tillis, who serves on the Senate Banking Committee that must confirm Warsh, announced in January that he would oppose any Trump nominee to the Fed until the U.S. Department of Justice closes its investigation into Powell. 

“If there were any remaining doubt whether advisors within the Trump Administration are actively pushing to end the independence of the Federal Reserve, there should now be none,” Tillis said. “I will oppose the confirmation of any nominee for the Fed – including the upcoming Fed Chair vacancy – until this legal matter is fully resolved.”

If all Democrats on the committee vote against confirmation along with Tillis, then the measure would fail.

The Senate Banking Committee agreed last week to begin hearings for Warsh.

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White House and Fed incentives will always collide, especially amid uncertain economic conditions and high political stakes. 

Markets can tolerate disagreement. But they probably can’t abide doubt about whether monetary policy decisions come from data or decree. If investors begin to suspect the latter, then the very growth the president seeks could become harder to achieve. 

So as hearings begin and rhetoric escalates, the Fed’s independence again faces a test.  Will this episode, too, fade into the long ledger of presidential–Fed clashes? Or will the outcome this time be different?