The Fed's Ultimate Test Could Make It Stronger Than Ever

For over a year, Donald Trump has unleashed a relentless assault on Fed Chair Jerome Powell, yet the central bank hasn't budged an inch. Now, this unprecedented political pressure campaign might actually backfire—potentially emerging as the strongest validation of Fed independence in decades.

Trump's attacks have been extraordinary in their scope and intensity. He's berated Powell almost daily for not cutting rates faster, launched a Department of Justice criminal probe into the Fed chair, and attempted to fire Fed Governor Lisa Cook over mortgage fraud allegations. Powell's response? He called it "politically motivated" and stood his ground.

But here's the twist: this extreme test of Fed independence could end up strengthening it more than any policy speech or academic paper ever could.

A Battle 70 Years in the Making

The Fed has faced political pressure before, but never like this. In the 1950s, Harry Truman pressured the Fed to keep rates low to fund the Korean War. In 1964, Lyndon Johnson physically shoved Fed chief William Martin at his Texas ranch, shouting: "Martin, my boys are dying in Vietnam, and you won't print the money I need." Martin didn't cave.

Yet Trump's campaign represents something entirely different—a sustained, public, multi-front assault using every tool of presidential power, including criminal investigation. It's uncharted territory that's forcing everyone to pick sides.

And increasingly, they're picking the Fed's side.

The Supreme Court's Likely Lifeline

The most significant development may come from an unexpected source: the Supreme Court. During a recent two-hour oral argument session on Lisa Cook's case, justices appeared inclined to set a high bar for removing Fed policymakers—effectively "Trump-proofing" the central bank.

"The oral arguments showed that the predisposition of the Supreme Court is to support the independence of the Fed," said Gary Richardson, a former Fed historian now at UC-Irvine. "They might come down with a decision this term that substantially strengthens the independence of the Federal Reserve and protects the Fed against Donald Trump."

Such a ruling wouldn't just provide legal protection—it would send a powerful signal about institutional boundaries that even presidents can't cross.

The Rally-Around-the-Flag Effect

Inside the Fed, something remarkable is happening: unprecedented institutional solidarity. In the two weeks since the DOJ probe was announced, three top Fed officials have publicly backed Powell: New York Fed President John Williams, Minneapolis Fed President Neal Kashkari, and Philadelphia Fed President Anna Paulson.

"There is going to be a rally around the leader phenomenon here," explained David Wessel from the Brookings Institution. "Whatever your views are about interest rates, most of the people at the Fed feel pretty strongly about maintaining the independence of the Fed and upholding the institution."

Even Wall Street, typically cautious about antagonizing presidents, has quietly supported the Fed. JPMorgan Chase CEO Jamie Dimon warned: "You don't want to chip away too much because... it will drive rates higher, not lower." Notably, Trump sued Dimon for $5 billion just days after this comment.

The Fed's Careful Balancing Act

The Fed has tried to accommodate Trump in other areas while defending its core monetary policy independence. Powell announced a 10% staff reduction over several years, and Fed Vice Chair Michelle Bowman said banking regulatory staff would be slashed 10% within a year. The Fed also downplayed climate-related work and diversity initiatives.

But these concessions haven't satisfied Trump. At Davos, even while discussing Greenland acquisition, he couldn't resist calling Powell a "terrible chairman" and demanding: "We should be paying the lowest interest rate of any country in the world."

The Four-Month Countdown

Powell's term expires in four months, and Trump has already choreographed a public succession race. The four final candidates include Kevin Hassett (White House economic aide), Kevin Warsh (former Fed governor), Christopher Waller (current Fed governor), and Rick Rieder (BlackRock executive). Trump hints he's already made his choice.

Next week's Federal Open Market Committee meeting—the first since the DOJ probe was announced—will be closely watched. "Get the popcorn ready because we think this will be an FOMC meeting unlike any other during the Powell era," said RSM's chief economist Joseph Brusuelas.

What's Really at Stake

This isn't just about interest rates or personalities—it's about whether democratic institutions can maintain their independence under extreme political pressure. The Fed's response has been notably different from the deference most business leaders have shown Trump to avoid retribution.

"We're never going to be influenced by any political pressure," Powell declared last April. "Our independence is a matter of law."

Cornell's Ryan Chahrour captures the unprecedented nature of this moment: "Certainly, since I've been following the Fed, we've never had anything even remotely like this. So it's all uncharted territory."