Thou shalt not cross: Trump listens to Wall Street on the Fed

Even Senator Elizabeth Warren, a prominent left-leaning Democrat on the Senate Banking Committee and a long-time Powell critic, called foul. "Nobody is fooled by President Trump and Republicans' sudden interest in building renovations," she wrote. "It's clear pretext to fire Fed Chair Powell." Warren, incidentally, was the only member of the committee to vote against Powell's confirmation in 2022.

Political interference

In his second term, Trump is throwing his weight around. In early February, just days after his inauguration, Trump asked Powell to slash the benchmark interest rate by a full percentage point, believing that it would immediately reduce government debt servicing costs and potentially save $1tn annually. Powell rejected the request.

Brian Moynihan, the chief executive of Bank of America (the world's second biggest bank), pointedly remarked that long-term economic health must be prioritised over short-term political wins. That is the essence of the Fed's independence: making data-driven decisions, free from political calculations.

Around the world, the financial world shook. Both the Financial Times and Wall Street Journal raised red flags over Trump's political pressure on the Federal Reserve, warning that it could damage investor confidence, destabilise markets, and jeopardise the Fed's global role as an economic safety valve. Installing a compliant Fed chair beholden to the White House, they argued, would damage US credibility and increase borrowing costs.

Market reaction

This wave of pushback forced Trump to dial things down. After checking market screens and seeing Wall Street's reaction, he changed his tone and denied any intent to fire Powell. He made a similar retreat in early April when markets shuddered in response to Trump's announcement of new tariffs. He backpedalled and extended negotiation timelines, opting for bilateral talks instead.

The lesson from both episodes is important: Trump listens to the language of markets. In fact, he only listens to the language of markets.

A pragmatic figure, Powell approaches his role with diligence and rigour, basing decisions on economic data, not ideology, impulse, or business-world bravado. His steady statements and reasoned posture reflect this. When Trump vented at him on the eve of the US election in November, urging an interest rate cut, Powell coolly replied that he would await the latest unemployment and inflation figures were out.

Amidst Trump's renewed offensive, Powell has said that the fate of interest rates hinges on the outcomes of Trump's tariff war, and that the Fed is waiting for data to assess the impact of them on inflation. Powell, it seems, remains unshaken. Similarly, in August last year, markets were rattled by an employment report. Powell still refused to cut rates, saying he needed the right data, often released with a lag.

Not backing down

Just as he resisted investor pressure a year ago, Powell shows no sign of acting hastily, even though the economic case for rate cuts may now exist. Yet Financial Times board member Gillian Tett is among those concerned that the pressures facing the Federal Reserve might now go beyond simply ousting Powell, but rather, may signal a broader agenda to reshape policymaking and undermine institutional independence by bringing the Fed under the Treasury.

Trump's goal is to restructure America's $37tn debt mountain and reassess national assets, but such tactics risk eroding investor confidence, impairing monetary policy, and weakening the Fed's role as a bulwark against inflation.

Paul Volcker, the formidable Fed Chair of the 1980s, argued that a credible Fed must operate independently and consistently—even in the face of fiscal or political pressure—and that such credibility can only be earned over time through disciplined policy.

When President Barack Obama was first elected, a cartoon did the rounds depicting him in front of a mirror asking: "Mirror, mirror, on the wall, who takes the most important decisions of them all?" The mirror replied: "The central bankers, Mr President." So it remains.