Home Insights Macro views Renewed threats to the Fed’s independence
Aerial view of a shipping yard at sunset.

Renewed threats to the Fed’s independence

July 24, 2025 | 6 min read
Christian Floro, CFA, CMT
Market Strategist
Seema Shah
Chief Global Strategist
linkedin icon link icon

President Donald Trump’s longstanding criticism of Federal Reserve (Fed) Chairman Jerome Powell—ironically, someone Trump appointed during his first administration—remains front and center. The most recent flashpoint came about last week when Trump drafted a letter firing Chair Powell and asked GOP lawmakers whether he should send it. The resulting market reaction was so swift and negative, as long-end bond yields surged and the dollar fell, that Trump quickly reversed course and indicated he wasn’t planning to fire Powell.

While Trump’s dissatisfaction with the Fed and Powell is no secret, Trump’s recent remarks have exacerbated market concerns that the question of Fed independence will be raised again in due course, particularly if the Fed delays cutting policy rates.

Understanding how this could unfold—and how markets might react—is essential in an environment already shaped by elevated policy uncertainty.

Why is Fed independence important?

The Fed's operational autonomy, especially when it comes to setting interest rates, is paramount to bond market investors. Its independence ensures market credibility, provides a foundation for inflation expectations, and, as a result, gives confidence to buyers of U.S. Treasury securities—both domestic and foreign. This confidence helps dampen interest rate volatility, particularly at the long end of the yield curve. Any erosion of this trust could lead Treasury buyers to seek alternatives, leading to higher U.S. interest rates.

Furthermore, its credibility increases the effectiveness of its conventional policy toolkit and allows it to implement unconventional policies, including forward guidance and asset purchases.

Crucially, monetary policy actions are most beneficial when central banks are divorced from the short-term political cycle, instead focusing on the longer-run perspective concerning its mandates. Indeed, economic studies suggest that central bank independence lowers the inflation rate in developing economies by between 1 and 6 percentage points . In addition, estimates indicate that a loss of Fed independence would cumulatively increase CPI by 11 percentage points by the end of 2028 .

As such, it is clear that the economic fallout from a loss of central bank independence—and compromised monetary policy—would likely be severe.

What is President Trump’s authority to fire Jerome Powell?

Jerome Powell holds three positions at the Fed: the Federal Board of Governors Chair and FOMC Chair, as well as a member of the Board of Governors. His term as Board Chair and FOMC Chair expires in May 2026, and his term as a member of the Board of Governors ends in January 2028. Distinct from the Board Chair, which is nominated by the President and confirmed by the Senate, the Federal Open Market Committee (FOMC) Chair is chosen by members of the FOMC—not the President—although historically the same person fills both roles. It’s also rare for members of the Board to stay on after their term as Board or FOMC Chair ends.

The president’s ability to remove Powell remains legally ambiguous. The Supreme Court has recently created a carve-out for the Fed that protects Powell from being fired without cause. However, the Federal Reserve Act of 1913 allows the President to remove members of the Federal Reserve Board, including Jerome Powell, but specifically only “for cause.” Courts have historically interpreted this term as requiring “inefficiency, neglect of duty, or malfeasance in office.”

Most recently, the administration has taken steps to criticize Powell over his handling of the Fed’s extensive renovation project in its buildings in Washington as a potential pretext to fire Powell “for cause.” However, it is worth noting that this approach still faces significant legal uncertainties.

Separately, the Act doesn’t say anything about Trump demoting a Board Chair— presumably in the hope that Powell would then also step down as Fed Chair—though this would also likely lead to a potentially protracted court battle, especially as there is no historical precedent for such a move. Moreover, even if the administration was successful, it still allows Powell to serve the rest of his term as a member of the Board of Governors until 2028, continuing to exert his influence on the FOMC.

What’s stopping the President from following through on his threats?

The market serves as an essential check to any president's, including President Trump’s, actions with the Fed, and will likely make its voice known clearly and aggressively if it senses a loss of the Fed’s independence. As witnessed last week, this would result in increased market volatility, a weaker dollar, and higher long-end yields. This threat of bond market turmoil is likely what prodded Mr. Trump to soften his stance on firing Powell, and what could keep the administration from pushing the envelope further.

This is particularly true amid the administration’s focus on keeping interest rates low, as it needs to roll over about 30% of maturing debt this year and as Congress passed a new tax cut bill that requires a further expansion of the deficit.

How will Fed policy be impacted?

Given the potential market fallout, it seems unlikely that President Trump will fire Chair Powell. However, with Powell’s term as Fed Chair ending in May, Trump could accelerate his pick for the next Fed Chair, choosing to nominate one as early as the fall as he has said. If openly very vocal, this nominee could potentially override the Fed’s ability to provide forward guidance. While investors have largely dismissed these concerns, the fact that current Treasury Secretary Scott Bessent was the first to introduce the idea of creating a “Shadow Fed Chair” gives it a bit more weight. Moreover, even if the next Fed Chair is credible and independent, markets may also be increasingly suspicious of future Fed decisions.

Of course, the Fed will likely try to ignore all the political undertones and instead focus on a data-dependent approach. Unfortunately for them, the current data does not tell a clear economic story—major structural forces underway in the labor market may further exacerbate conflicting signals, and tariff policy remains highly uncertain. With the economy failing to provide a definitive rationale for policy decisions, it leaves greater scope for question marks over the Fed’s decisions and motivations.

Decisions to continue holding rates steady will amplify political noise, and there are risks that markets may perceive such a policy move as motivation to emphasize Fed independence. On the other hand, any future rate cuts may be tainted with some suspicion around politicization.

How does all this impact financial markets?

The latest development introduces another unwelcome source of uncertainty for investors, adding volatility to a year already marked by significant policy upheaval.

This challenged policy backdrop is likely to drive bond market volatility and potentially reduce the effectiveness of the Fed’s monetary transmission mechanism. Indeed, if central bank credibility continues to be eroded, whenever the Fed resumes its rate-cutting cycle, the resulting drop in longer-end bond yields may be muted by an increase in risk premiums—flying directly in the face of what President Trump is trying to achieve.

Finally, these dynamics should add to the ongoing near-term headwinds facing the U.S. dollar. A return to policy certainty and credibility is likely needed to put a floor under the greenback. Absent that, the continued stress around the independence of U.S. institutions should keep the dollar vulnerable to further downward adjustment.

Macro views

Footnotes

According to a 2020 study by Ana Garriga and Cesar Rodriguez on Central Bank independence's effect on inflation in developing countries.  According to the Peterson Institute, as of September 2024, “The International Economic Implications of a Second Trump Presidency”
Disclosure

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Risk considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk.

Important information
This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. Information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account. Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided.

This material may contain ‘forward‐looking’ information that is not purely historical in nature and may include, among other things, projections, and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

This material is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

This document is intended for use in:

  • The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.
  • Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland. Clients that do not directly contract with Principal Global Investors (Europe) Limited (“PGIE”) or Principal Global Investors (Ireland) Limited (“PGII”) will not benefit from the protections offered by the rules and regulations of the Financial Conduct Authority or the Central Bank of Ireland, including those enacted under MiFID II. Further, where clients do contract with PGIE or PGII, PGIE or PGII may delegate management authority to affiliates that are not authorized and regulated within Europe and in any such case, the client may not benefit from all protections offered by the rules and regulations of the Financial Conduct Authority, or the Central Bank of Ireland. In Europe, this document is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID).
  • United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorized and regulated by the Financial Conduct Authority (“FCA”).
  • This document is marketing material and is issued in Switzerland by Principal Global Investors (Switzerland) GmbH.
  • United Arab Emirates by Principal Investor Management (DIFC) Limited, an entity registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as an Authorised Firm, in its capacity as distributor / promoter of the products and services of Principal Asset Management. This document is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organisation.
  • Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No.199603735H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act 2001. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
  • Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068, AFS Licence No. 225385), which is regulated by the Australian Securities and Investments Commission and is only directed at wholesale clients as defined under Corporations Act 2001.
  • Hong Kong SAR by Principal Asset Management Company (Asia) Limited, which is regulated by the Securities and Futures Commission. This document has not been reviewed by the Securities and Futures Commission. This document may only be distributed, circulated or issued to persons who are Professional Investors under the Securities and Futures Ordinance and any rules made under that Ordinance or as otherwise permitted by that Ordinance.
  • Other APAC Countries/Jurisdictions. This material is issued for Institutional Investors only (or professional/sophisticated/qualified investors, as such term may apply in local jurisdictions) and is delivered on an individual basis to the recipient and should not be passed on, used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Principal Global Investors, LLC (PGI) is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA), a commodity pool operator (CPO) and is a member of the National Futures Association (NFA). PGI advises qualified eligible persons (QEPs) under CFTC Regulation 4.7.

Principal Asset Management℠ is a trade name of Principal Global Investors, LLC.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Principal Securities, Inc., 800‐547‐7754, Member SIPC and/or independent broker/dealers. Principal Life, Principal Funds Distributor, Inc., and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.

© 2025 Principal Financial Services, Inc. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.

4692517
About the author