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Political Pressure Tests Fed's Independence as Rate-Cutting Rift Widens

Political Pressure Tests Fed's Independence as Rate-Cutting Rift Widens

Bitget-RWA2025/09/27 23:50
By:Coin World

- The Fed cut rates by 25 bps in Sept 2025, its first reduction since Dec 2024, amid Trump's pressure on Chair Powell over high borrowing costs. - Trump's failed removal of Governor Cook and appointment of rate-hawk Miran highlighted political interference risks, with Miran dissenting from the cut as a dual White House-Fed appointee. - While 11/12 Fed members supported the cut, internal divisions emerged over easing pace, with nine FOMC members forecasting no further cuts this year despite projections of t

Political Pressure Tests Fed's Independence as Rate-Cutting Rift Widens image 0

On September 17, 2025, the Federal Reserve reduced its key interest rate by 0.25 percentage points, implementing its first rate decrease since December 2024. This move brought the federal funds rate down to a 4.00%-4.25% range and came amid mounting political pressure from President Donald Trump, who has consistently urged Fed Chair Jerome Powell to take stronger action to lower borrowing costs. Trump's outspoken criticism, including a recent "You’re Fired" message aimed at Powell, has spotlighted the administration’s attempts to sway monetary policy, despite the Fed’s longstanding tradition of independence.

Alongside the rate cut, the Fed’s Summary of Economic Projections indicated plans for two more cuts in 2025 and another in 2026. Officials pointed to a weakening job market and increasing inflation concerns as primary reasons for the decision. The unemployment rate is projected to climb to 4.5% by the end of the year, while Personal Consumption Expenditures (PCE) inflation is expected to stay above the 2% goal at 3% this year, then decline to 2.6% by 2026. Powell described the move as a "risk management" strategy to address potential threats to employment, but acknowledged that a single quarter-point reduction would not drastically change the economic outlook.

Tensions rose before the announcement, as Trump sought to oust Fed Governor Lisa Cook, accusing her of mortgage fraud. However, a federal appeals court blocked the attempt, allowing Cook to participate in the policy meeting. At the same time, Trump appointed Stephen Miran, a strong proponent of lower rates, to the Fed’s Board of Governors. Miran, confirmed by the Senate just before the meeting, opposed the quarter-point cut and instead pushed for a 50-basis-point reduction. His dissent marked the first instance in nearly 90 years where a White House official held roles in both the executive branch and the Fed, raising questions about potential conflicts of interest.

The Fed’s action also revealed internal disagreements. While 11 out of 12 voting members backed the 25-basis-point cut, Miran’s opposition highlighted deeper divisions over how quickly and how much to ease monetary policy. Observers noted that nine of the 19 FOMC members did not foresee additional cuts this year, which contrasted with the median forecast of two more reductions. Powell defended the measured approach, explaining that the Fed’s dual mandate—maintaining price stability and maximizing employment—requires careful consideration of both inflation and job market risks. He also minimized the effects of Trump’s tariffs, stating their impact on inflation was "smaller and slower" than previously anticipated.

The political ramifications of the Fed’s moves remain a subject of debate. Trump has argued that high interest rates hinder economic growth and increase the government’s debt burden, while critics caution that politicizing the Fed could threaten its long-term effectiveness. Nobel laureate Paul Krugman warned that Trump’s pressure could lead to stagflation—simultaneous high inflation and unemployment—by damaging the central bank’s credibility. Meanwhile, global leaders such as European Central Bank President Christine Lagarde have voiced support for Fed independence, warning that losing autonomy would be a "very serious danger" for the global economy.

Looking forward, the Fed’s ability to maintain its independence will be put to the test. With two more policy meetings scheduled in 2025 and possible changes to the Federal Open Market Committee in 2026, the tension between political influence and sound economic policy will remain in the spotlight. Powell’s term as chair ends in May 2026, and Trump has already begun considering candidates for the position, including Miran and other supporters of more aggressive rate reductions. However, as former Fed Chair Alan Greenspan once said, the central bank’s credibility depends on its consistency and independence—qualities that could be at risk if political interference continues.

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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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