President Donald Trump has never shied away from criticizing the Federal Reserve, but his latest campaign to pressure Fed Chair Jerome Powell may be the clearest signal yet that the Fed still has the final say in monetary policy.
Trump's attacks on the central bank, via social-media and public and private comments, were a test of how far American political leaders are willing to go to influence monetary policy and how far the central bank is prepared to go to resist them.
The standoff between Trump and Powell, whom the president dubbed "Mr. Too Late" for the Fed's refusal to cut interest rates, had its roots in the Trump administration's "Liberation Day" announcement of a sweeping trade policy shift that would apply a baseline 10% tariff on most imports, with higher rates for countries running large trade surpluses with the U.S.
The proposal was met with immediate skepticism by markets. Stocks fell sharply and Treasury yields lurched lower as investors began repricing expectations for growth and inflation. In response, the White House implemented a 90-day pause on many of the new tariffs, with the exception of those on China. But uncertainty had already gripped investors, and stocks continued their downward spiral.
Powell appeared at the Economic Club of Chicago on April 16 and delivered a measured but unmistakable warning. "We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension, " he said, noting that tariffs are "highly likely to generate at least a temporary rise in inflation" with potentially more persistent effects. Trump's tariffs, he said, could put the economy on a path toward weaker growth and faster inflation.
Economists call that toxic combination stagflation.
Trump didn't like what he heard, nor the fact that the Fed seems inclined to keep interest rates unchanged, for now. In a series of public remarks and posts on Truth Social, he called Powell a "major loser," said his " termination cannot come fast enough," and accused the Fed of playing politics. Trump's top economic adviser, Kevin Hassett, told reporters the president was "studying" whether he could remove Powell before his term as Fed chair expires in May 2026.
The Wall Street Journal reported that Trump had privately discussed firing Powell for months and had discussed the possibility with former Fed Governor Kevin Warsh, including the possibility of selecting Warsh as Powell's replacement.
Warsh has been openly critical of the Powell Fed. In a lecture on Friday, he claimed that the central bank was politically motivated, losing credibility, and in need of a "strategic reset."
In the past few weeks, ahead of the quiet period preceding the Fed's May policy meeting, many Fed officials spoke publicly about monetary policy, using the opportunity to defend the institution and Powell.
Chicago Fed President Austan Goolsbee warned that political pressure could compromise the credibility of monetary policy. The Fed's credibility is "its most precious resource," said Philadelphia Fed President Patrick Harker, and Minneapolis Fed President Neel Kashkari said that Powell had done a "terrific job" as Fed chair.
Trump's criticism also prompted bipartisan support for central-bank independence. Senator Elizabeth Warren (D., Mass.), an outspoken Powell critic, warned on CNBC that "if Chairman Powell can be fired by the president of the United States, it will crash the markets."
Powell hasn't commented on Trump's latest jibes, but when questioned directly in the past about whether he would resign if Trump asked him to, he had said he wouldn't, reiterating that the law doesn't allow a president to remove a Fed chair without cause.
For now, at least, Trump has backed off. In an Oval Office appearance on April 22, he said he had "no intention" of firing Powell, and claimed that he "never did." Stock futures jumped immediately following his remarks.
The reversal appears to have come after internal pushback by Trump's advisors. Warsh reportedly advised the president that removing Powell would cause more political damage than it would solve.
Treasury Secretary Scott Bessent attempted to defuse the situation further, saying he wasn't concerned about the possibility of Trump ousting Powell or challenging the independence of the Fed. "I believe that monetary policy is a jewel box that's got to be preserved," Bessent said.
Publicly, Trump insisted the idea had never been under serious consideration. Privately, his advisers appeared to recognize what markets and Fed officials already understood: The Fed had won this round.
"This was a policy-induced shock and the market did the work," said Alicia Levine, head of investment strategy and equities for BNY Wealth. She noted that the Fed's refusal to respond to political noise reinforced its credibility. "They made clear they would not come to the rescue" by lowering rates to offset damage caused by the tariffs, she said.
Some argue that Powell retained his job because removing him would be legally fraught. Others say that keeping him in place offers Trump a political advantage. If the economy falters or inflation rates rise again before the 2026 election, Powell may provide a convenient scapegoat. Either way, Powell has made clear the Fed won't be pressured into preemptive action.
Still, the challenges are far from over for Powell and the Fed. Fed officials will need to navigate the impact of "substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation," as Powell noted in his Chicago speech. The central bank must also prepare for a potential Supreme Court decision regarding the president's firing of certain public officials that could weaken its independence.
Investors are navigating a range of possible outcomes as a result of Trump's tariff policy, said John Workman, managing director at Pathstone, a wealth-management firm. "We are in a vacuum of clarity, and that is feeding volatility," he said. "Companies are holding back. Sentiment is already shifting."
Markets currently expect the Fed to keep interest rates unchanged at its May 6-7 policy meeting, but begin reducing interest rates in June, with three or four quarter-percentage-point cuts projected by the end of 2025, according to CME Group's FedWatch tool. However, Fed officials note that tariff-induced inflation could complicate this timeline.
The Fed's commitment to its dual mandate -- the pursuit of maximum employment and price stability -- provides a stabilizing force for the economy and financial markets. "Don't fight the Fed" is a favorite Wall Street maxim. It may gain credence in Washington, too.
