Can the Federal Reserve win the battle to defend its independence? Powell's reappointment may be the key to victory or defeat

Bank of America believes that there is little to fear from Trump nominating a new Federal Reserve Chair; if Powell remains as a governor, the White House's ability to exert pressure will be greatly limited. In addition, a more hawkish committee would leave a chair eager to accommodate Trump’s hopes for rate cuts powerless.

Source: Golden Ten Data

Looking ahead to 2026, a key question is to what extent political factors will permeate the operations of the Federal Reserve. Since the beginning of this year, U.S. President Trump and his cabinet have been lobbying the Fed to cut interest rates and adjust monetary policy, which is not without precedent in history.

However, this Trump administration has also taken more extreme measures: threatening to fire Fed Chair Powell and launching personal attacks against him, attempting to remove other members of the Federal Open Market Committee (FOMC), and even personally visiting the Fed headquarters during a dispute over renovation costs.

Looking forward, analysts are already considering what a Fed Chair nominated by Trump would mean for the central bank’s independence. As Paul Donovan of UBS emphasized in a client report earlier this week, a chair who overly aligns with the White House’s views could repeat the disastrous collaboration between President Nixon and Arthur Burns in the 1970s.

Donovan added: “Burns ultimately faced resistance within the Fed, and given that Fed policymakers have recently shown a stronger spirit of independence in their voting patterns, one should be cautious not to overinterpret the actions of a single individual at the Fed.”

Aditya Bhave, Senior U.S. Economist at Bank of America, expressed a similarly cautious attitude at a recent media briefing. When asked by Fortune magazine about the risks to Fed independence under a new chair, Bhave said the issue “almost depends more on the overall composition of the committee, rather than just the Fed Chair.”

He explained: “We know there will be a new Fed Chair, who may take Steven Miran’s seat on the Board. So in that sense, assuming the new appointee has similar policy inclinations as Miran, simply changing personnel won’t really alter the overall tendency of the Board. The question then becomes, will Powell remain as a governor?”

Miran was previously chair of Trump’s Council of Economic Advisers and earlier this year replaced Adriana Kugler on the FOMC after her resignation. He is widely seen as a temporary appointment, with his term expected to end next month.

Although Powell’s term as Fed Chair will end in May 2026, his term as a Fed governor does not expire until January 2028—meaning he could break with tradition and remain at the Fed for several more years, which would likely frustrate the White House.

Bhave added: “On this point, Powell has been very vague. In the past 75 years, there is almost no precedent for a chair remaining as a governor, but Powell has not said he would leave either.”

In the face of a series of criticisms from the White House, Powell has remained a staunch defender of the Fed’s independence. He has made it clear that if the White House asked him to resign, he would not comply, adding that any attempt by the administration to do so would be illegal.

This summer, Powell told Bloomberg: “Our independence is a legal matter. Generally speaking, the Fed’s independence is widely understood and supported in Washington and Congress, and that’s what really matters. The key is that we are able to make decisions, and we only make decisions based on our best judgment, based on the best analysis of the data, about how to achieve our dual mandate goals... to best serve the American people.”

The composition of the FOMC is the more critical issue

Last month, Atlanta Fed President Raphael Bostic confirmed he will retire at the end of his term in February 2026, meaning another vacancy on the FOMC that Trump could fill with a dovish economist.

There is also the issue of Governor Lisa Cook, whom Trump previously tried to remove from the committee. She will defend herself at a Supreme Court hearing next January. The White House is hoping for a favorable legal outcome, which would give them further opportunities to appoint their preferred candidates.

Bhave added: “If you’re thinking about a wholesale shift in the Fed’s mindset, I think these issues are much more important than who the next chair is. If you have a Fed Chair saying ‘I want to cut rates to 2.5%,’ but the committee is hesitant even about Powell’s proposed 25 basis point cut, then I don’t think the chair would make much progress in that situation—in our estimation, about 8 of the 12 regional Fed presidents do not want to cut rates, whether they have stated so explicitly or are inclined not to.”