Increasing political pressure that threatens to undermine the Federal Reserve’s independence may significantly damage the economy in the long term, even as lower interest rates resulting from this pressure will likely lead to a short-term economic boost.
President Donald Trump, who recently fired the head of the Bureau of Labor Statistics amid a disappointing jobs report, now has his eyes set on the Federal Reserve.
Long a critic of Chairman Jerome Powell for consistently not lowering interest rates, Trump has now agreed for the Justice Department to open an investigation into one of the bank’s board members over claims she misled on a mortgage application. He has also called for Lisa Cook’s firing, even as the claims are being investigated.
Cook, a Federal Reserve governor since 2022 and the first black woman in her position, has sued the Trump administration in federal court, arguing that her dismissal would be both unlawful and politically motivated. She has not been charged with any offense.
A federal judge ruled on Sept. 9 that the president is not able to remove Cook from the board. She is allowed to continue serving while she contests her dismissal.
Executive meddling
Such meddling from the executive, if ultimately successful for the president in terms of him exercising more control, would lead to far lower interest rates, something Trump has consistently argued for. Questions remain, however, as to just how sustainable that might be, sources say.
“Cheap money might inflate the vibes while deflating the fundamentals,” said Michael Ashley Schulman, partner and chief investment officer at wealth management firm Running Point Capital Advisors. “If rate cuts become politically engineered rather than data-driven, the market may party like it is 1999 just before the hangover of mispriced risk and loss of central bank credibility kicks in.”
Such political interference and its likely consequences for monetary policy could lead to major inflationary pressures as the traditional separation between the executive and the running of the Federal Reserve becomes narrower.
“An independent central bank has long been associated with lower inflation rates,” said Mark Schweitzer, associate professor of economics at Case Western Reserve University. “If political pressure undermines that independence, markets could lose confidence quickly and the cost of borrowing could rise even if the Fed forces rates lower.”
Short-term gain
Most observers are confident that a lowering of interest rates would likely lead to an immediate boost of confidence in an economic environment that remains uncertain.
Such moves could improve the confidence of businesses to take on risk and grow while also easing debt payments for consumers, real estate investors, and homeowners.
“It could even push more people to finally sell and buy homes, which the housing market badly needs,” said Joseph Camberato, CEO at National Business Capital, a New York state-based financial lending company. “At the end of the day, confidence is what drives action, and rate cuts would give the economy that shot of that.”
The questions remain, however, as to the extent of such interest rate cuts amid more political influence. How far would such influence go, and what kind of interest rate cuts might that lead to?
“Slashing rates in a high-deficit, supply-constrained, demographically aging economy could juice asset prices — stocks, real estate — but whether it fuels inflationary demand or increases supply remains to be seen, while the real economy keeps muttering about productivity and labor force participation,” Schulman said.
Sources, however, doubt that such rate slashing is likely to occur even in a more politicized Federal Reserve environment.
In such extreme moves, there might be too much danger for the financial markets, which could interpret such rate cuts as more politically driven and not exclusively economically based, said Shawn DuBravac, CEO and president at the Avrio Institute, a strategic consultancy. That could cause term premia to rise, which would, in turn, push up longer-term rates.
Instead, less dramatic cuts in interest rates seem more likely.
“A dramatic, politically directed cut in rates is less plausible in the near-term, and could be completely offset by market forces that are out of the reach of the president,” DuBravac said.
Whatever the future of interest rate policy, inflation remains a concern, and any excessive cut in such rates wouldn’t help.
“If there were a large decline in rates that would certainly stimulate the economy and might lead to inflation well above the Fed’s target — indeed, we already are stubbornly above the 2% target of the Fed,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business. “In any case, I don’t anticipate drastic declines in short-term interest rates, but potentially greater declines than if the board were unchanged. Declines in rates would likely stimulate the economy somewhat, but I am doubtful that there will be a dramatic drop in interest rates.”
Whatever the eventual outcome, most observers are wary of such political interference in traditionally independent bodies.
Even supporters of Trump have criticized his moves regarding the central bank, along with other politically motivated recent decisions.
Hedge fund billionaire Ken Griffin, who voted for Trump, said in a Sept. 7 Wall Street Journal opinion piece that the president is playing a “risky game” through his interference in forcing the Federal Reserve to lower rates, threatening to fire Cook, and firing the head of the BLS.
Writing in conjunction with Anil Kashyap, a University of Chicago professor and adviser to the Chicago Fed, Griffin, the CEO of Citadel, said undermining the independence of the central bank could eventually stoke higher inflation and much higher long-term rates.
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“Together, these developments highlight risks that recall experiences in emerging markets where political influence eroded institutional credibility,” the two wrote. “While the U.S. benefits from a large stock of credibility accumulated over decades, it isn’t limitless. If eroded, markets will demand far higher interest rates for longer-term debt.”
U.S. inflation accelerated in August at a speed likely to preserve caution about any quickening pace in reducing interest rates. The Consumer Price Index rose 2.9% compared with the same time last year, the fastest annual pace since the start of 2025, according to a Sept. 11 BLS report.
Nick Thomas is a writer based in Denver.
