The US has a Weird Relationship with its Central Bank

The Trump administration has been pushing to get Powell out. I think its pretty clear that they are trying to do this through public relations as they have no legitimate means to do so[1, 2, 3].

This is all really weird for two reasons: 1. Trump originally nominated Powell in 2017 and 2. the central bank's independence is important for market stability.

I won't delve into 1 but 2 is pretty important to understand. The Trump administration has not appeared particularly strong on economics, of course, so I do not believe they should have the authority to make economic decisions of any complexity. They have imposed economic policies such as but not limited to: tariffing everyone and creating a reciprocal tariff equation grounded in 5 minutes of economic theory. I also did a review of the Project 2025 handbook (Mandate for Leadership: the Conversative Promise) several months ago (when we still had a YouTube channel) and that included items such as (I am not even joking) a sort of pseudo argument for how exports don't contribute positively to GDP.

Now, why is it an issue if the US government interferes with the central bank's operations?

The central bank looks at (primarily) inflation, unemployment, and currency reserves. They regulate this by setting a centralized interest rate which affects economic activity and attractiveness of the domestic currency relative to foreign currencies. Lower interest rates prompt more lending, and lending creates money, which leads to inflation (currency supply goes up, reducing demand per unit of supply, pushing currency value down).

The greatest fear is that the central bank will be pressured into monetizing government deficits by 'printing money' (which will likely drive the currency value down, pushing the deficit up, initiating more currency issuance, and leading to an inflationary spiral). Alternatively, there are concerns that pressure to reduce interest rates will cause the economy to overheat, where the negative effects of inflation far exceed the benefits of increased economic activity from lower interest rates (although this is typically less of a concern, the central bank is much better equipped to make these decisions than the government). Additionally, economic growth must eventually slow down to a sustainable rate, so trying to push economic activity up forever is futile.

The effects of the Trump administration meddling with the central bank's independence will likely result in lower sovereign bond ratings, higher inflation, currency flights, greater susceptibility to economic recessions, and reduced long term economic performance.

Of course, none of this is historically inconsistent for them.

If you found this helpful or enjoyable, please consider subscribing to our newsletter for more.  

You can reach out to us here for consulting services or here to discuss booking a workshop to learn useful skills and help you get more familiar with us. 

References

[1] MarketWatch. (2025, July 16). Is Trump threatening to fire Jerome Powell just to bury the Jeffrey Epstein story? Sure looks like it. MarketWatch. Retrieved July 17, 2025, from https://www.marketwatch.com/story/is-trump-threatening-to-fire-jerome-powell-just-to-bury-the-jeffrey-epstein-story-sure-looks-like-it-6c539aa0

[2] Hunnicutt, T. (2025, July 16). Trump says he's not planning to fire Fed's Powell. Reuters. Retrieved July 17, 2025, from https://www.reuters.com/world/us/trump-indicated-republican-lawmakers-he-will-fire-feds-powell-cbs-reports-2025-07-16/ 

[3] Reuters. (2025, July 15). Investors seek protection from risk of Fed chief’s ouster. Retrieved July 17, 2025, from https://www.reuters.com/business/finance/investors-seek-protection-risk-fed-chiefs-ouster-2025-07-15/