President Donald Trump wants to assume control of the United States’s monetary policy. He wants to force the Chairman of the Federal Reserve Board, Jerome Powell, to resign so that he can appoint a new chairman who will follow Trump’s orders on interest rates and monetary policy more generally. Trump’s director of the Office of Management and Budget, OMB, is trying to undermine Powell’s integrity at this very moment.

These actions are damaging the stature of the Federal Reserve, the U.S. central bank. It’s a silly war for the president to be waging.

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Inflation is running at about 2.7%. But over the last 3 months, inflation has fallen and economic activity has slowed. Treasury yields, however, have remained elevated. Seemingly, financial markets don’t have confidence in Trump’s economic policies. The market is undoubtedly right to be skeptical of Trump’s effort to seize power from the Federal Reserve.

After all, an independent Federal Reserve is essential to a well-functioning economy and the economically efficient conduct of monetary policy. When central banks are independent of the political sphere, the data is clear: inflation is lower, and economic efficiency is enhanced. When politicians conduct monetary policy, economies pay the price. Why?

Simple. Politicians will try to accelerate economic activity just before elections, using monetary policy to subsidize politically important industries. The effect is that inflation inevitably becomes embedded in an economy. Inflation undermines economic activity and sometimes society. In 1998, the United Kingdom made its central bank independent from Parliament. Policymakers understood that an independent Bank of England enhanced economic efficiency and supported the British currency, the pound.

Instead, Trump wants fiscal dominance. He is demanding that the Federal Reserve consider the size of the federal deficit, around 100% of GDP. He wants lower rates to reduce debt service costs, which are now consuming about 3% of GDP and account for about 16% of total federal spending. The Federal Reserve is resisting Trump’s pressure.

Under Powell, the Federal Reserve conducts monetary policy according to its legislated mandate of a 2% inflation rate and full employment. The level of the federal deficit is a political issue, not a matter for the Federal Reserve. If Trump wants lower rates, he should focus on policies to reduce the deficit, higher taxes, or spending reforms. Instead, with his Big Beautiful Bill, he is increasing the federal deficit. 

For over 100 years, the Federal Reserve has been entrusted with the legislated responsibility to maintain price stability for the U.S. economy. Price stability has been defined as 2% inflation over time. This inflation rate is sufficiently high to ensure that deflation does not grab hold of the U.S. economy. Yet, it is low enough to ensure that businesses and consumers make economic decisions based on their economic outlook and not because of inflation. Well-anchored inflation expectations are necessary for a well-functioning economy. 

Economic history teaches that high inflation harms the economy. Businesses and consumers suffer economic losses. In the 1960s, under pressure from then-President Lyndon Baines Johnson, then-Chief of the Federal Reserve William McChesney Martin kept interest rates low even though inflationary pressures were building throughout the economy.

The Johnson Administration, with the approval of Congress, adopted a guns and butter fiscal policy. Congress funded the Vietnam War and provided the necessary funds for Johnson’s War on Poverty. Inflation increased. The Federal Reserve failed to act by aggressively raising rates. Johnson controlled the monetary policy. The inevitable happened: economic activity slowed, and inflation spread throughout the economy. Later in the 1970s, the price of oil and gasoline soared because of Middle Eastern politics. High inflation became embedded in the U.S. economy. Inflation rose to double-digit rates in the 1970s. Businesses made decisions based on inflation, not returns on capital. Economic efficiency suffered. 

In the early 1980s, Federal Reserve Chairman Paul Volcker decided to crush inflation. The Federal Reserve raised interest rates to almost 20%. The Federal Reserve engineered a recession to break the inflationary spiral. Unemployment soared. But price stability was restored. U.S. policymakers effectively achieved price stability from the mid-1980s until the COVID-19 pandemic. The U.S. economy flourished. In the face of the rise of China, the U.S. maintained its share of global GDP while the economies of Western Europe atrophied. Low inflation is an essential factor for a strong economy. 

Trump should learn from more recent history.

When the COVID-19 pandemic swept in, Trump and President Joe Biden engaged in excessive fiscal stimulus. This excessive stimulus, combined with supply chain disruptions caused by the pandemic, caused inflation to spike to 8%. The Federal Reserve said that inflation would be transitory. The Federal Reserve was wrong. When the Federal Reserve realized its error, it aggressively raised interest rates. Only slowly did inflation fall.

Now, on a one-year basis, inflation in the U.S. is running at about 2.7%. Just a few months ago, the Federal Reserve and financial markets were confident that the Fed would achieve its 2% inflation target by the end of 2025 or early 2026. But politics upset the inflation outlook. The markets know that Trump’s tariffs are inflationary. The Big Beautiful Bill increases the deficit and creates added stimulus for the economy.

The Federal Reserve has signaled that rate cuts are coming. But the Federal Reserve wants to wait to assess the inflationary effects of Trump’s policies. The Federal Reserve does not want to cut rates prematurely and undo all the progress on reducing inflation from almost 8% to the current 2.7%. It knows there is little harm in waiting and much risk in rushing.

Ultimately, the market decides the appropriate level of interest rates. If Trump takes over control of monetary policy, interest rates would almost certainly soar due to market reactions. The Treasury market is suspicious of Trump’s policies. Higher rates would slow economic growth and make servicing the federal deficit even more expensive.

A SENSIBLE LOOK AT THE STATE DEPARTMENT CUTS

In theory, a Trump-dominated Federal Reserve could resort to quantitative easing, whereby the Federal Reserve purchases Treasury debt to lower rates. But quantitative easing raises the money supply. The Federal Reserve would print money to buy outstanding federal debt, and an increasing money supply can cause inflation.

In a recent opinion, the Supreme Court of the U.S. went out of its way to clearly signal that Trump does not have the power to remove Powell. The Federal Reserve Chairman has stated point-blank that he will not resign. He will serve out his term, which ends in May 2026.

James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X here and reached at [email protected]