Trump’s Pressure Could Backfire—Sending Interest Rates Soaring Higher

Fed faces political heat as Trump amps up rate criticism—just as markets brace for prolonged tightening.

Why jawboning the Fed rarely works

Central banks hate looking political. When a president—current or former—tries strong-arming monetary policy, independence instincts kick in. The result? Policy makers dig in harder.

The irony? All this comes as inflation data shows stubborn stickiness. The Fed's nightmare scenario: getting painted as either a political puppet or an out-of-touch institution. Either way—rates stay higher for longer.

Bonus cynicism: Nothing unites central bankers faster than politicians telling them how to do their jobs. Except maybe Wall Street bonus season.

Trump’s pressure may backfire and keep rates high

“I fully understand that my strong criticism of him makes it more difficult for him to do what he should be doing, lowering Rates,” Trump wrote last month.

Economists note that history shows the dangers of political pressure on central banks. When Paul Volcker became Fed chair in 1979, he took office partly to reverse the Fed’s earlier reluctance to fight high inflation, a reluctance tied to pressure from President Richard Nixon.

Volcker’s tough stance restored the Fed’s standing on stable prices and set the stage for decades of low inflation.

That experience, along with similar cases worldwide, has led experts to conclude that independent monetary policy tends to produce better economic outcomes.

“If you believe that the central bank is going to make decisions that even marginally tilt more toward political pressures, you’re going to expect higher inflation, more volatility in the macroeconomy,” said Julia Coronado, founder of MacroPolicy Perspectives.

Coronado’s expectation for the next Fed chair is to be less committed to the institution’s independence than recent chairs. “It’s not going to be some arsonist that comes in and lights the institution on fire. I think it’ll be more incremental but still meaningful,” she said.

Trump is considering three or four candidates and will make his choice “very soon.”

“If I think somebody’s going to keep the rates where they are or whatever, I’m not going to put them in. I’m going to put somebody that wants to cut rates,” he said last month.

Desai said the president “will continue to nominate the most qualified individuals who can best serve the American people.”

Treasury Secretary Scott Bessent, reportedly in the running, said on June 30 that the administration will name Powell’s successor in the coming weeks and months.

The rest of the candidates include Kevin Warsh, a former Fed governor; Christopher Waller, a present Fed governor; Kevin Hassett, the White House economic adviser; and David Malpass, the former World Bank president.

Scott Bessent, Hassett, and Malpass all say the Fed should have cut rates already. Waller, pointing to recent economic data, said a rate cut could be warranted as early as this month, though he emphasized the need to keep monetary policy free from politics.

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