Fed Defies Trump Pressure, Holds Rates Steady in Test of Independence

The Federal Reserve just delivered a 97% expected decision that carries 100% unexpected political weight. By holding rates steady at 3.5-3.75%, the central bank didn't just make monetary policy—it drew a line in the sand.

The Decision That Wasn't Really About Economics

Wednesday's rate hold was a foregone conclusion. CME FedWatch had pegged the probability at over 97%, and markets barely blinked when the announcement came. The Fed cited "elevated uncertainty about the economic outlook" while noting that "economic activity has been expanding at a solid pace."

The numbers tell a mixed story. The US added 584,000 jobs in 2025—the weakest annual growth since 2003. December's 50,000 job gain was modest but represented recovery from October's 105,000 loss. Yet with Amazon and UPS announcing tens of thousands of cuts this week, and a potential government shutdown looming as early as Saturday, the economic picture remains cloudy.

But this decision wasn't really about the data. It was about power.

When Politics Meets Monetary Policy

Donald Trump has made no secret of his desire for "more aggressive interest rate cuts" and a Fed chair "who shares his views." His December Truth Social post was unambiguous: "Anybody that disagrees with me will never be the Fed Chairman!"

The pressure campaign has escalated beyond rhetoric. Jerome Powell, whose term expires in May, recently faced a Justice Department subpoena—which he called a "pretext" to pressure the Fed. "The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president," Powell said.

Meanwhile, the Supreme Court heard arguments last week on whether Trump can remove Fed Governor Lisa Cook over mortgage fraud allegations. And Stephan Miran, whose term expires this week, was one of only two governors who voted for rate cuts alongside Christopher Waller.

Global Stakes in American Independence

The implications extend far beyond US borders. Tiff Macklem, Bank of Canada Governor, put it bluntly: "The Federal Reserve is the biggest, most important central bank in the world, and we all need it to work well. A loss of independence of the Fed would affect us all."

Macklem was among central bank chiefs who issued a joint statement backing Powell earlier this month. He'd previously warned that Trump's Fed pressure was "starting to hit markets"—a concern that proved prescient as political tensions now overshadow economic fundamentals.

The market's muted response—Dow flat, Nasdaq unchanged, S&P 500 down just 0.1%—suggests investors are still processing what this political standoff means for future policy.

The Independence Paradox

Central bank independence rests on a democratic paradox: unelected officials making decisions that affect millions of lives. The theory is that removing short-term political pressures allows for better long-term economic outcomes. But when those officials consistently oppose an elected president's agenda, who really has the mandate?

Trump's frustration isn't entirely without precedent. Presidents have long chafed at Fed decisions—Richard Nixon famously pressured Arthur Burns, and Harry Truman clashed with the entire Fed leadership. But the current confrontation feels different in its public nature and legal implications.