The Importance of Fed Independence

Roger W. Ferguson Jr. is the Steven A. Tananbaum Distinguished Fellow for International Economics at the Council on Foreign Relations. Maxmilian Hippold is a research associate for international economics at CFR.

President Donald Trump has long been a critic of Federal Reserve Chair Jerome Powell, whom he appointed in 2018. Since beginning his second term, Trump has continued to call for lower interest rates and has repeatedly expressed frustration with Powell’s resistance. In recent weeks, however, Trump’s public criticism has reached new heights, threatening the independence of the Federal Reserve and demonstrating a remarkable willingness to risk the role of the United States as the bedrock of global financial stability.

In a meeting with legislators on July 15, Trump reportedly discussed the possibility of firing Powell and even held up a draft of the letter he would use to do so. Although he later backtracked following public outcry, his administration continues to publicly advocate for rate cuts and appears to still be considering Powell’s removal. On Truth Social, Trump demanded that interest rates be lowered from the 4.25–4.50 percent range to as low as 1 percent at the Fed meeting in July.

In a highly unusual move, President Trump also visited the Federal Reserve’s headquarters in Washington, DC, on July 24 to inspect ongoing renovations and highlight their rising costs. Some analysts have speculated that Trump could use those cost overruns as justification for removing Powell—though most legal experts question the legitimacy of such a rationale. Comparable projects in Washington, such as the construction of a Capitol Visitors Center, have similarly gone over budget.

Amid those developments, Federal Reserve Governor Adriana Kugler unexpectedly announced her resignation from the board of governors, effective August 8. The day before her resignation was to take effect, Trump selected his ally Stephen Miran, also a vocal critic of Powell, to fill the spot until the end of Kugler’s term set for January 31. 

The Importance of Independence

The Federal Reserve’s independence as practiced today was not always a given. In the first decades following its founding in 1913, the executive branch (particularly the Treasury Department) maintained significant control over monetary policy. The Fed did not secure true operational independence from the federal government until the Treasury-Federal Reserve Accord of 1951, which allowed it to set monetary policy without concern for the long-term borrowing costs of the U.S. government.

The importance of that independent monetary policy is multifaceted. First, it shields the Federal Reserve from undue political influence, such as pressure from the White House to lower interest rates ahead of an election, which could offer short-term political gains but cause long-term economic harm. Second, independence enhances the Fed’s credibility and fosters market confidence in its decisions. Crucially, it also empowers the Federal Reserve to take difficult but necessary actions, even when they are unpopular.

A prime example is the tenure of Chair Paul Volcker (1979–87), during which the Fed confronted stagflation—an unusual combination of high inflation and stagnant economic growth. To combat inflation, the Fed made the unpopular decision to sharply raise interest rates, triggering a deep economic recession. Although those policies caused significant short-term hardship for many American households, they ultimately restored price stability and laid the foundation for sustained economic growth. Without independence from political decision-makers, such bold and necessary actions would have been far less likely.

Today, the Federal Reserve’s independence remains central to the strength of the U.S. economy and the global standing of the U.S. dollar. Public pressure from the president on the Fed (such as speculation about removing the Fed chair) undermines that independence and risks eroding confidence in the dollar as the world’s reserve currency. This uncertainty could lead investors to demand higher interest rates on U.S. sovereign debt at the same time the federal government is projected to run increasingly large deficits.

The dangers of undermining central bank independence are far from hypothetical. Numerous countries have faced economic crises as a direct result of political interference in monetary policy. The most recent example is Turkey. In 2019, after President Recep Tayyip Erdoğan appointed close allies to lead the central bank, the country adopted an unorthodox monetary policy based on Erdoğan’s belief that lowering interest rates would spur growth and simultaneously contain inflation. That approach led to years of high inflation, peaking at 75 percent in May 2024. Eventually, Erdoğan reversed course and allowed a more conventional monetary policy to rein in inflation. Even so, inflation remains elevated at 38 percent today.

A New Fed Chair

The Federal Reserve’s July 30 decision to hold interest rates steady until its next scheduled meeting in September has further frustrated Trump and his supporters. In the same week, the Bureau of Labor Statistics released updated figures showing a slowdown in hiring over the past three months and an increase in unemployment. Trump responded by firing the bureau’s head, Erika McEntarfer, alleging without evidence that she had faked the numbers. Given the Fed’s dual mandate to ensure price stability and maximize employment, those developments have complicated its economic outlook.

Although President Trump will have the opportunity to appoint a new Federal Reserve chair next May when Powell’s term concludes, he may not wait that long. McEntarfer’s dismissal from the Bureau of Labor Statistics has only fueled speculation. However, the U.S. Supreme Court has recently indicated that the Fed chair cannot be removed without cause. Treasury Secretary Scott Bessent, regarded as a more measured voice in Trump’s inner circle, reportedly opposed Powell’s dismissal on both legal and economic grounds. Although Bessent has declined to be considered for the role himself, he recently urged the Fed to conduct an internal review of its nonmonetary policy operations. President Trump will likely refrain from firing Powell outright, opting instead to announce his nominee for the next chair in the coming months—thereby increasing pressure on the current leadership.

In the thick of mounting criticism and a growing public pressure campaign, some economic analysts have begun calling on Powell to resign to safeguard the Fed’s independence. Mohamed El-Erian, chief economic advisor at Allianz, has argued that the current heated climate is unsustainable and risks intensifying and widening criticism of Powell’s leadership, thereby eroding the institution’s credibility. In his view, Powell’s resignation would help de-escalate tensions and be the most constructive path forward.

However, such a move would set a troubling precedent for future administrations, in which Fed chairs could be pressured to resign simply because the White House disagrees with their monetary policy decisions—undermining the fundamental independence of the institution. For the stability of the dollar and the entire U.S. financial system, it is critical that Powell does not resign prematurely. Equally important is that the next chair not be seen as a political loyalist of President Trump, but rather as an independent figure committed to upholding the integrity of the Federal Reserve System.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.