US President Donald Trump with Federal Reserve chair Jerome Powell as they inspect renovations to the Federal Reserve in Washington, DC, on 24 July 2025 (Andrew Caballero-Reynolds/Getty Images)

The Fed digs in its heels

Jay Powell has demonstrated that he is no pushover, and that central bank independence remains.

John Edwards

14 January 20264 min read

Bravo Jay Powell!

It is not often a central banker has to publicly take on a country’s political leader. Yet there is no doubt the US Federal Reserve chair is quite right to call out the Justice Department investigation of his conduct over building renovations to the Fed’s Washington headquarters. It is clearly designed by the Trump administration to intimidate him and the Federal Reserve, and to extend presidential authority to monetary policy decisions. By publicly calling the move for what it is, Powell has in the last few months of his otherwise sedate and perhaps grey chairmanship transformed himself into a memorable central banker.

Perhaps future US presidents will take the lesson that the Fed is easy to intimidate. The more likely outcome is that they learn Fed chairs can be tougher than they look. If Trump is to create a precedent for presidents to tell the Federal Reserve what to do, he has to force Powell out before the end of his term. So far, Trump’s chances don’t look good. His conduct may actually affirm that the Fed has the independence conferred on it by Congress.

For all the controversy, there is unlikely to be any significant economic or financial impact from the Justice Department's probe.

As ever with Trump, his motives are mysterious. He can have no real disagreement with the Federal Reserve over the last few months. It has cut rates at all three of its recent meetings. Nor has it ruled out further cuts. Anyway, Powell has only three meetings to go before his term as chair ends. A more pliant nominee will then take over. So why mess with Powell now? There is not enough time for the Justice Department investigation to proceed very far, and resigning early could be interpreted as an admission of guilt. Surely this was evident to the White House before the indictment process began.

It is possible Trump wants reassurance that Powell will go from the Federal Reserve Board, where he is entitled to remain as an ordinary member when his term as chair ends. Powell’s resignation from the Board would create another vacancy for Trump to fill. Perhaps lawyers acting for the wholly independent Justice Department Secretary Pam Bondi might discreetly communicate to Powell’s lawyers that if Powell is no longer on the Board, Bondi might make a wholly independent decision to drop the whole matter. That certainly is possible, though even for Trump it seems far-fetched. And Powell will almost certainly resign from the Board in May anyway. It would be asking too much of a public spirited former chair to voluntarily sit through long discussions led by a new chair whose competence he may not respect.

For all the controversy, there is unlikely to be any significant economic or financial impact from the Justice Department's probe, at least for now. The US economy is in fine shape. The most recent inflation reading (November) came in at 0.1% on the Cleveland Fed trimmed mean measure, taking the 12 month rate down to 2.9%. The October reading was the same as November, suggesting that inflation is heading back down smartly, tariffs notwithstanding. GDP growth was unexpectedly strong at an annualised rate of 4.3% for the September quarter. Unemployment has crept up to 4.4% for December, compared to 4.1% a year ago.

These are lovely numbers for a central bank. They abundantly warrant the quarter per cent cuts to the policy rate in September, October and December of last year, but do not necessarily demand further rate cuts now. Powell’s earlier reluctance to cut was soundly based on the uncertainty over the inflation impact of Trump’s tariffs, now happily shown to be less than widely expected.

The Australian Reserve Bank's chair, Michelle Bullock, and her monetary policy committee have much harder choices than the Fed, given the upward bounce in Australia’s inflation in September and at the same time some weakness evident in employment. (As it happens, the RBA also faces vast cost overruns on its building renovation in Martin Place, mainly due to the vast amount of asbestos in the old building.)

As ever with Trump, his motives are mysterious. He can have no real disagreement with the Federal Reserve over the last few months.

Given his intention to stay to May, Powell will chair interest rate setting meetings of the Fed in January, March and April. He is not particularly hawkish, and nor is the majority of the 12-member rate setting committee, as evidenced by the rate cuts decided at those last three meetings. At 3.72%, the effective policy rate in the United States is still well above the average level of the last 25 years (admittedly a weird period for the US economy and financial markets) and, for that matter, still above the Australian policy rate.

Whatever Trump’s preferences may be, the Open market Committee may well decide on one or two more cuts before Powell steps down in May. Two of the opponents of cuts at the last three meetings, Chicago Fed president Austan Goolsbee and Kansas Fed president Jeffrey Schmidt, have now been rotated out and will be replaced for the coming January meeting by other Fed regional bank chairs. The replacements may or may not be as reluctant to go along with rate cuts. In any case, Powell had a solid majority for the three rate cuts last year, with one dissident (Trump appointee Stephen Miran) wanting even bigger cuts.

About the author

John Edwards

John Edwards is a Nonresident Fellow at the Lowy Institute and an Adjunct Professor with the John Curtin Institute of Public Policy at Curtin University.

Topics

United States Economy