Why the Federal Reserve has historically been independent of the White
House
[August 26, 2025] By
CHRISTOPHER RUGABER
WASHINGTON (AP) —
President Donald Trump says he is firing Federal Reserve Governor Lisa
Cook late Monday, in a move viewed as a sharp escalation in his battle
to exert greater control over the independent institution.
Trump said in a letter posted on his Truth Social platform Monday that
he is firing Cook because of allegations that she committed mortgage
fraud. The allegation was made last week by Bill Pulte, a Trump
appointee to the Federal Housing Administration, an agency that
regulates mortgage giants Fannie Mae and Freddie Mac.
Cook previously said she would not leave her post.
Trump has repeatedly attacked the Fed’s chair, Jerome Powell, for not
cutting its short-term interest rate, and even threatened to fire him.
Powell, who will speak Friday at an economic symposium in Jackson Hole,
Wyoming, says the Fed wants to see how the economy responds to Trump’s
sweeping tariffs on imports, which Powell says could push up inflation.
Powell's caution has infuriated Trump, who has demanded the Fed cut
borrowing costs to spur the economy and reduce the interest rates the
federal government pays on its debt. Trump has also accused Powell of
mismanaging the U.S. central bank’s $2.5 billion building renovation
project.
Firing the Fed chair or forcing out a governor threatens the Fed’s
venerated independence, which has long been supported by most economists
and Wall Street investors. Here's what to know about the Fed:
Why the Fed's independence matters
The Fed wields extensive power over the U.S. economy. By cutting the
short-term interest rate it controls — which it typically does when the
economy falters — the Fed can make borrowing cheaper and encourage more
spending, accelerating growth and hiring. When it raises the rate —
which it does to cool the economy and combat inflation — it can weaken
the economy and cause job losses.
Economists have long preferred independent central banks because they
can more easily take unpopular steps to fight inflation, such as raise
interest rates, which makes borrowing to buy a home, car, or appliance
more expensive.
The importance of an independent Fed was cemented for most economists
after the extended inflation spike of the 1970s and early 1980s. Former
Fed Chair Arthur Burns has been widely blamed for allowing the painful
inflation of that era to accelerate by succumbing to pressure from
President Richard Nixon to keep rates low heading into the 1972
election. Nixon feared higher rates would cost him the election, which
he won in a landslide.
Paul Volcker was eventually appointed chair of the Fed in 1979 by
President Jimmy Carter, and he pushed the Fed's short-term rate to the
stunningly high level of nearly 20%. (It is currently 4.3%). The
eye-popping rates triggered a sharp recession, pushed unemployment to
nearly 11%, and spurred widespread protests.
Yet Volcker didn't flinch. By the mid-1980s, inflation had fallen back
into the low single digits. Volcker's willingness to inflict pain on the
economy to throttle inflation is seen by most economists as a key
example of the value of an independent Fed.
Investors are watching closely
An effort to fire Powell would almost certainly cause stock prices to
fall and bond yields to spike higher, pushing up interest rates on
government debt and raising borrowing costs for mortgages, auto loans,
and credit card debt. The interest rate on the 10-year Treasury is a
benchmark for mortgage rates.
[to top of second column] |
Federal Reserve Chairman Jerome Powell, and Board of Governors
member Lisa Cook, right, listen during an open meeting of the Board
of Governors at the Federal Reserve, June 25, 2025, in Washington.
(AP Photo/Mark Schiefelbein, File)
 Most investors prefer an independent
Fed, partly because it typically manages inflation better without
being influenced by politics but also because its decisions are more
predictable. Fed officials often publicly discuss how they would
alter interest rate policies if economic conditions changed.
If the Fed was more swayed by politics, it would be harder for
financial markets to anticipate — or understand — its decisions.
The Fed's independence doesn't mean it's unaccountable
Fed chairs like Powell are appointed by the president to serve
four-year terms, and have to be confirmed by the Senate. The
president also appoints the six other members of the Fed's governing
board, who can serve staggered terms of up to 14 years.
Those appointments can allow a president over time to significantly
alter the Fed's policies. Former president Joe Biden appointed four
of the current seven members: Powell, Cook, Philip Jefferson, and
Michael Barr. A fifth Biden appointee, Adriana Kugler, stepped down
unexpectedly on Aug. 1, about five months before the end of her
term. Trump has already nominated his top economist, Stephen Miran,
as a potential replacement, though he will require Senate approval.
Cook's term ends in 2038, so forcing her out would allow Trump to
appoint a loyalist sooner.
Trump will be able to replace Powell as Fed chair in May 2026, when
Powell’s term expires. Yet 12 members of the Fed’s interest-rate
setting committee have a vote on whether to raise or lower interest
rates, so even replacing the Chair doesn’t guarantee that Fed policy
will shift the way Trump wants.
Congress, meanwhile, can set the Fed's goals through legislation. In
1977, for example, Congress gave the Fed a “dual mandate” to keep
prices stable and seek maximum employment. The Fed defines stable
prices as inflation at 2%.
The 1977 law also requires the Fed chair to testify before the House
and Senate twice every year about the economy and interest rate
policy.
Could the president fire Powell before his term ends?
The Supreme Court earlier this year suggested in a ruling on other
independent agencies that a president can't fire the chair of the
Fed just because he doesn't like the chair's policy choices. But he
may be able to remove him “for cause,” typically interpreted to mean
some kind of wrongdoing or negligence.
It's a likely reason the Trump administration has zeroed in on the
building renovation, in hopes it could provide a “for cause”
pretext. Still, Powell would likely fight any attempt to remove him,
and the case could wind up at the Supreme Court.
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