Since its beginning, the U.S. Federal Reserve has prided itself on independence, shielding monetary policy from short-term political pressures. Yet with Donald Trump’s second term in office, that independence has faced one of its greatest tests, as the president openly criticizes its interest rate decisions, threatening to fire Fed officials, thereby blurring the line between political power and economic policy.
Donald Trump’s distaste towards the Fed began shortly after his inauguration, where he had repeatedly lashed out against key officials, including its chair – Jerome Powell, labelling him a ‘numbskull’ due to his refusal to cut rates this year. In late August, the White House seeked to remove the Fed Governor, Lisa Cook, from her position, further escalating tensions. Trump’s intervention likely jeopardizes the cornerstones of the U.S. Financial System by threatening the perceived independence of the Fed, suggesting that monetary decisions are based on political whims, and creating uncertainty in financial markets, where investors rely on the Fed’s objectivity. The Federal Reserve’s autonomy is crucial in maintaining the stability of the U.S. economy, and such political interference risks eroding this, especially in the world post-COVID. By allowing the Fed to retain its autonomy, it is able to make decisions based on economic data and long-term objectives, especially decisions that may be politically unpopular, such as increasing rates to control inflation or stimulate employment.
As of September 17th 2025, the Federal Reserve has reduced base rates by a quarter percentage point to a range of 4.0% to 4.25%, signalling their cautious support for economic growth while still maintaining their cornerstones of inflation control. It is crucial to first understand Donald Trump’s demands of slashing interest rates to three percentage points lower than its current range. Significantly reducing interest rates can lower the short-term cost of borrowing for households and businesses, while also decreasing the return on savings for consumers, thus leading to increased investments and consumption. This can boost GDP growth, which was at 3.3% in Q2 of 2025, increasing from the -0.5% in Q1, as well as push stock markets higher and reduce unemployment, all outcomes Trump points to as measures of his economic success. Moreover, with the 2026 Midterm elections approaching, the political landscape is becoming increasingly charged. By cutting rates and creating a booming economy in the short-term, this would allow Trump to present himself as the architect of renewed prosperity, strengthening the Republican Party’s electoral appeal. Trump has also repeatedly linked his presidency to the performance of U.S. stock markets, describing rising stock prices as indications of his success. By cutting rates, this would further push investors into the equity market, instead of bonds, thus inflating stock prices – a direct benefit to Trump’s narrative of economic strength.
However, upon closer examination, Donald Trump’s confrontations with the Federal Reserve appear highly illogical. Experts warn that undermining this independence could have serious consequences: Investopedia notes that politicizing the Fed might raise, rather than lower, long-term borrowing costs, including mortgages, as markets expect higher inflation in the future. Experts at the National Association of Mortgage Underwriters further explain that ‘a hasty or ill-timed rate cut, especially one perceived as politically motivated, could do more harm than good – raising long-term borrowing costs, undermining financial confidence, and complicating the path to sustained economic growth.’ A decision to cut base rates as dramatically as he wishes would run counter to the prevailing global monetary trends of maintaining rates to combat inflation. In the United Kingdom, for instance, the Bank of England has lowered base rates to 4%, after maintaining rates at 5.25% for a year, while similarly, the ECB and other developed economies have kept rates elevated to prevent post-COVID instability. Were the Fed to follow Trump’s demands, it would not only risk fueling domestic inflation, but weaken the dollar and trigger capital outflows, as investors could seek higher returns abroad. Artificially cheap borrowing could overstimulate demand, fuel inflationary pressures from its current 2.9%, and undermine the dollar’s strength by driving investors towards markets offering higher returns.
Historical precedent reinforces such dangers: Nixon’s interference with the Fed in the early 1970s, aimed at securing short-term economic growth before his re-election, contributed to the stagflation crisis that plagued the decade. More recently in 2014, Turkey under President Erdogan illustrates the perils of politicized monetary policies: between 2019 and 2024, he fired and replaced five central bank governors for their refusal to cut interest rates, and when the central bank eventually succumbed to Erdogan’s pressures, the lira collapsed and inflation soared above 85%. Economists today echo such warnings. Nearly 600 Economists, including Nobel Laureates Joseph Stiglitz, Claudia Goldin, and Paul Romer, signed an open letter urging respect for the principle of central bank independence and due process in the case of the attempted removal of Federal Reserve Board Governor Lisa Cook. A poll conducted in July 2025 by Reuters further revealed that over 70% of economists expressed concern about the independence of the U.S. Federal Reserve in the future, with the senior U.S. strategist at Rabobank, Philip Marey, stating that ‘I am more worried about the Fed’s independence than I was a few months ago.’ These examples clearly underscore that whilst Trump’s push for interest rate cuts may carry short-term political appeal, the economic consequences may mirror those seen in countries where politicized monetary policies have ended disastrously.
Whilst Donald Trump’s attempts to pressure the Federal Reserve into cutting rates may offer short-term political and electoral gains, its long-term economic consequences are striking. Historical examples, alongside expert commentary, have illustrated the dangers of politicizing the U.S.’s monetary policy, leading to soaring inflation, higher borrowing costs for businesses and consumers, and lasting economic damage that no short-term political gain can justify.
Written by Kelly Ng
