This opinion column originally ran at Project Syndicate.
While recent media coverage of the US Federal Reserve has tended to focus on when, and by how much, interest rates will be cut, larger issues loom. The selection of a new Fed chair to succeed Jerome Powell, whose term ends next May, should focus not on short-term market considerations, but on policies and processes that could improve the Fed’s overall performance and accountability.
By demanding that the Fed cut the federal funds rate sharply to boost economic activity and lower the government’s borrowing costs, US President Donald Trump risks pushing the central bank toward an overly inflationary monetary policy. And that, in turn, risks increasing the term premium in the ten-year Treasury yield—the very financial indicator that Treasury Secretary Scott Bessent has emphasized. A higher premium would raise, not lower, borrowing costs for the federal government, households, and businesses alike. Moreover, concerns about the Fed’s independence in setting monetary policy could undermine confidence in US financial markets and further weaken the dollar’s exchange rate.
But this does not imply that Trump should simply seek continuity at the Fed. The Fed, under Powell, has indeed made mistakes, leading to higher inflation, sometimes inept and uncoordinated communications, and an unclear strategy for monetary policy.
I do not share the opinion of Trump and his advisers that the Fed has acted from political or partisan motives. Even when I have disagreed with Fed officials or Powell on matters of policy, I have not doubted their integrity. However, given their mistakes, I do believe that some institutional introspection is warranted. The next chair—along with the Board of Governors and the Federal Open Market Committee—will have many policy questions to address beyond the near-term path for the federal funds rate.
Three issues are particularly important. The first is the Fed’s dual mandate: to ensure stable prices and maximum employment. Many economists (including me) have been critical of the Fed for exhibiting an inflationary bias in 2021 and 2022. The highest inflation rate in 40 years raised pressing questions about whether the Fed has assigned the right weights to inflation and employment.
Clearly, the strategy of pursuing a flexible average inflation target (implying that inflation can be permitted to rise above 2% if it had previously been below 2%) has not been successful. What new approach should the Fed adopt to hit its inflation target? And how can the Fed be held more accountable to Congress and the public? Should it issue a regular inflation report?
The second issue concerns the size and composition of the Fed’s balance sheet. Since the global financial crisis of 2008, the Fed has had a much larger balance sheet and has evolved toward an “ample reserves model” (implying a perpetually high level of reserves). But how large must the balance sheet be to conduct monetary policy, and how important should long-term Treasury debt and mortgage-backed securities be, relative to the rest of the balance sheet? If such assets are to play a central role, how can the Fed best separate the conduct of monetary policy from that of fiscal policy?
The third issue is financial regulation. What regulatory changes does the Fed believe are needed to avoid the kind of costly stresses in the Treasury market we have witnessed in recent years? How can bank supervision be improved? Given that regulation is an inherently political subject, how can the Fed best separate these activities from its monetary policymaking (where independence is critical)?
Addressing these policy questions requires a rethink of process, too. The Fed would be more effective in dealing with a changing economic environment if it acknowledged and debated more diverse viewpoints about the roles of monetary policy and financial regulation in how the economy works.
The Fed’s inflation mistakes, overconfidence in financial regulation, and other errors partly reflect the “groupthink” to which all organizations are prone. Regional Fed presidents’ views traditionally have reflected their own backgrounds and local conditions, but that doesn’t translate easily into a diversity of economic views. Instead of choosing Fed officials based on how they are likely to vote at the next rate-setting meeting, Trump should put more weight on intellectual and experiential diversity. Equally, the Fed itself could more actively seek and listen to dissenting views from academic and business leaders.
Raising questions about policy and process offers guidance about the characteristics that the next Fed chair will need to succeed. These obviously include knowledge of monetary policy and financial regulation and mature, independent judgment; but they also include diverse leadership experience and an openness to new ideas and perspectives that might enhance the institution’s performance and accountability. One hopes that Trump’s selection of the next Fed chair, and the Senate’s confirmation process, will emphasize these attributes.
Fed Chair Jerome Powell (left) and Vice Chair Philip Jefferson (photo from federalreserve.gov)
Today (August 12), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for July. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).
The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.7 percent in July, unchanged from June.
The core inflation rate,which excludes the prices of food and energy, was 3.0 percent in July, up slightly from 2.9 percent in June. (Note that there was some inconsistency in how the core inflation rate is reported. The BLS, and some news outlets, give the value as 3.1 percent. The unrounded value is 3.0486 percent.)
Headline inflation and core inflation were slightly lower than what economists surveyed had expected.
In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) declined from 3.5 percent in June to 2.4 percent in July. Core inflation (the red line) increased from 2.8 percent in June to 3.9 percent in July.
The 1-month and 12-month inflation rates are telling somewhat different stories, with 12-month inflation indicating that inflation is stable, although moderately above the Fed’s 2 percent inflation target. The 1-month core inflation rate indicates that inflation may have increased during July.
Of course, it’s important not to overinterpret the data from a single month. The figure shows that the 1-month inflation rate is particularly volatile. Also note that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI, to evaluate whether it is hitting its 2 percent annual inflation target.
A key reason for core inflation being significantly higher than headline inflation is that gasoline prices declined by 23.1 percent at an annual rate in June. As shown in the following figure, 1-month inflation in gasoline prices moves erratically—which is the main reason that gasoline prices aren’t included in core inflation.
Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced) The following figure shows 12-month inflation in three categories of products whose prices are thought to be particularly vulnerable to the effects of tariffs: apparel (the blue line), toys (the red line), and motor vehicles (the green line). To make recent changes clearer, we look only at the months since January 2021. In July, prices of apparel fell, while the prices of toys and motor vehicles rose by less than 1.0 percent.
The following figure shows 1-month inflation in these prices of these products. In July, motor vehicles prices and apparel prices increased by less than 1 percent, while toy prices increased by 1.9 percent after having soared soared by 24.3 percent in June. At least for these three products, it’s difficult to see tariffs as having had a significant effect on inflation in July.
To better estimate the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation.
Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates.
Trimmed-mean inflation drops the 8 percent of goods and services with the highest inflation rates and the 8 percent of goods and services with the lowest inflation rates.
The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.2 percent in July, unchanged from June. Twelve-month median inflation (the red line) 3.6 percent in July, unchanged from June.
The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation declined from 3.9 percent in June to 2.9 percent in July. One-month median inflation also declined from 4.1 percent in June to 3.7 percent in July. These data indicate that inflation may have slowed in July (the opposite conclusion we noted earlier when discussing 1-month core inflation), while remaining above the Fed’s 2 percent target.
What are the implications of this CPI report for the actions the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next meetings? Even before today’s relatively favorable, if mixed, inflation report, the unexpectedly weak jobs report at the beginning of the month (which we discuss in this blog post) made it likely that the FOMC would soon begin cutting its target for the federal funds rate.
Investors who buy and sell federal funds futures contracts assign a probability of 94.3 percent to FOMC cutting its target for the federal funds rate at its September 16–17 meeting by 0.25 (25 basis points) from its current target range of 4.25 percent to 4.50 percent. That probability increased from 85.9 percent yesterday. (We discuss the futures market for federal funds in this blog post.) Investors assign a probability of 61.5 percent to the FOMC cutting its target again by 25 basis points at its October 28–29 meeting, and a probability of 50.3 percent to a third 25 basis point cut at the committee’s December 9–10 meeting.
Photo of President Trump and Fed Chair Powell from Reuters via the Wall Street Journal
Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) occurred against a backdrop of President Trump pressuring the committee to reduce its target for the federal funds rate and two members of the Board of Governors signalling that they were likely to dissent if the committee voted to hold its target constant.
Last week President Trump made an unusual visit to the Fed’s headquarters in Washington, DC to discuss what he had said was the Fed’s excessive spending on renovating three buildings. As we discuss in this blog post, the Supreme Court is unlikely to allow a president to remove a Fed chair because of disagreements over monetary policy. A president would likely be allowed to remove a Fed chair “for cause.” Some members of the Trump administration have argued that excessive spending on renovating buildings might be sufficient cause for the president to remove Fed Chair Jerome Powell. President Trump has indicated that, in fact, he doesn’t intend to replace Powell before his term as chair ends in May 2026, but President Trump still urged Powell to make substantial cuts in the federal funds rate target.
As most observers had expected, the committee decided today to keep its target range for the federal funds rate unchanged at 4.25 percent to 4.50 percent. Board of Governors members Michelle Bowman and Christopher Waller dissented, preferring “to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.” It was the first time since 1993 that two members of the Board of Governors have voted against an FOMC decision.
The following figure shows, for the period since January 2010, the upper bound (the blue line) and lower bound (the green line) for the FOMC’s target range for the federal funds rate and the actual values of the federal funds rate (the red line) during that time. Note that the Fed has been successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)
In his press conference following the meeting, Chair Powell indicated that a majority of the committee believed that: “Inflation is above target, maximum employment is at target, so policy should be slightly restrictive.” Policy is restrictive in the sense that the current range for the federal funds rate is higher than the long-run equilibrium rate. Powell noted that: “There are many uncertainties left to resolve. There is much more to come looking ahead.” Jn particular, with respect to the effect of tariffs, he stated that it’s “still quite early days …. [We’ve] seen substantial increases in tariff revenue collections … [but we] have to see how much of tariffs are passed through to consumers. A long way to go to know what has happened.”
One reason that President Trump has urged the FOMC to lower its target for the federal funds rate is that lower interest rates will reduce the amount the federal government has to pay on the $25 trillion in U.S. Treasury debt owned by private investors. At his press conference, Chair Powell was asked whether the committee discussed interest payments on the national debt during its deliberations. He responded that the committee considers only the dual mandate of price stability and maximum employment given to the Fed by Congress. Therefore, “We don’t consider the fiscal needs of the federal government.”
The FOMC’s next meeting is on September 16–17. Powell noted that before that meeting, the committee will have seen two more employment reports and two more inflation reports. The data in those reports may clarify the state of the economy. There has been a general expectation that the committee would cut its target for the federal funds rate at that meting
One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) The data from the futures market indicate that one month ago investors assigned a 75.4 percent probability to the committee cutting its target range by 0.25 percentage point (25 basis points) to 4.00 percent to 4.25 percent at the September meeting. Today, however, sentiment has changed, perhaps because investors now believe that inflation in coming months will be higher than they had previously expected. As the following figure shows, investors now assign a 55.0 percent probability to the committee leaving its target for the federal funds rate unchanged at that meeting and only a 45 percent probability of the committee cutting its target range by 25 basis points.
Today (June 27), the BEA released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2016, with inflation measured as the percentage change in the PCE from the same month in the previous year. In May, headline PCE inflation was 2.3 percent, up from 2.2 percent in April. Core PCE inflation in May was 2.7 percent, up from 2.6 percent in April. Headline PCE inflation was equal to the forecast of economists surveyed, while core PCE inflation was slightly higher than forecast.
The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation increased in from 1.4 percent in April to 1.6 percent in May. Core PCE inflation also increased from 1.6 percent in April to 2.2 percent in May. So, both 1-month PCE inflation estimates are close to the Fed’s 2 percent target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, these data likely don’t capture fully the higher prices likely to result from the tariff increases the Trump administration announced on April 2.
Fed Chair Jerome Powell has frequently noted that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)
Headline market-based PCE inflation was 2.1 percent in May, up from 1.9 percent in April. Core market-based PCE inflation was 2.4 percent in May, up from 2.3 percent in April. So, both market-based measures show similar rates of inflation in May as the total measures do. In the following figure, we look at 1-month inflation using these measures. The 1-month inflation rates are both lower than the 12-month rates. One-month headline market-based inflation was 1.5 percent in May, down from 2.3 percent in April. One-month core market-based inflation was 2.1 percent in May, down from 2.7 percent in April. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.
Earlier this week, the BEA released a revised estimate of real GDP growth during the first quarter of 2025—January through March. The BEA’s advance estimate, released on April 30, was that real GDP fell by 0.3 percent in the first quarter, measured at an annual rate. (We discussed the BEA’s advance estimate in this blog post.) The BEA’s revised estimate is that real GDP fell by 0.5 percent in the first quarter. The following figure shows the current estimated rates of real GDP growth in each quarter beginning in 2021.
As we noted in our post discussing the advance estimate, one way to strip out the effects of imports, inventory investment, and government purchases—which can all be volatile—is to look at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. According to the advance estimate, real final sales to private domestic purchasers increased by 3.0 percent in the first quarter of 2025. According to the revised estimate, real final sales to private domestic purchasers increased by only 1.9 percent in the first quarter, down from 2.9 percent growth in the fourth quarter of 2024. These revised data indicate that economic growth likely slowed in the first quarter.
In summary, this week’s data provide some evidence that the inflation rate is getting close to the Fed’s 2 percent annual target and that economic growth may be slowing. Do these data make it more likely that the Fed’s policymaking Federal Open Market Committee (FOMC) will cut its target for the federal funds rate relatively soon?
Investors who buy and sell federal funds futures contracts still expect that the FOMC will leave its federal funds rate target unchanged at its next meetings on July 29–30 and September 16–17. Investors expect that the committee will cut its target at its October 28–29 meeting. (We discuss the futures market for federal funds in this blog post.) There remains a possibility, though, that future macroeconomic data releases, such as the June employment data to be released on July 3, may lead the FOMC to cut its target rate sooner.
Fed Chair Jerome Powell speaking at a press conference following a meeting of the FOMC (photo from federalreserve.gov)
Members of the Fed’s policymaking Federal Open Market Committee (FOMC) had signaled clearly before today’s (June 18) meeting that the committee would leave its target range for the federal funds rate unchanged at 4.25 percent to 4.50 percent. In the statement released after its meeting, the committee noted that a key reason for keeping its target range unchanged was that: “Uncertainty about the economic outlook has diminished but remains elevated.” Committee members were unanimous in voting to keep its target range unchanged.
In his press conference following the meeting, Fed Chair Jerome Powell indicated that a key source of economic uncertainty was the effect of tariffs on the inflation rate. Powell indicated that the likeliest outcome was that tariffs would lead to the inflation rate temporarily increasing. He noted that: “Beyond the next year or so, however, most measures of longer-term expectations [of inflation] remain consistent with our 2 percent inflation goal.”
The following figure shows, for the period since January 2010, the upper bound (the blue line) and lower bound (the green line) for the FOMC’s target range for the federal funds rate and the actual values of the federal funds rate (the red line) during that time. Note that the Fed has been successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)
After the meeting, the committee also released a “Summary of Economic Projections” (SEP)—as it typically does after its March, June, September, and December meetings. The SEP presents median values of the 18 committee members’ forecasts of key economic variables. The values are summarized in the following table, reproduced from the release.
There are several aspects of these forecasts worth noting:
Committee members reduced their forecast of real GDP growth for 2025 from 1.7 percent in March to 1.4 percent today. (It had been 2.1 percent in their December forecast.) Committee members also slightly increased their forecast of the unemployment rate at the end of 2025 from 4.4 percent to 4.5 percent. (The unemployment rate in May was 4.2 percent.)
Committee members now forecast that personal consumption expenditures (PCE) price inflation will be 3.0 percent at the end of 2025. In March they had forecast that it would be 2.7 percent at the end of 2025, and in December, they had forecast that it would 2.5 percent. Similarly, their forecast of core PCE inflation increased from 2.8 percent to 3.1 percent. It had been 2.5 percent in December. The committee does not expect that PCE inflation will decline to the Fed’s 2 percent annual target until sometime after 2027.
The committee’s forecast of the federal funds rate at the end of 2025 was unchanged at 3.9 percent. The federal funds rate today is 4.33 percent, which indicates that the median forecast of committee members is for two 0.25 percentage point (25 basis points) cuts in their target for the federal funds rate this year. Investors are similarly forecasting two 25 basis point cuts.
During his press conference, Powell indicated that because the tariff increases the Trump administration implemented beginning in April were larger than any in recent times, their effects on the economy are difficult to gauge. He noted that: “There’s the manufacturer, the exporter, the importer and the retailer and the consumer. And each one of those is going to be trying not to be the one to pay for the tariff, but together they will all pay together, or maybe one party will pay it all.” The more of the tariff that is passed on to consumers, the higher the inflation rate will be.
Earlier today, President Trump reiterated his view that the FOMC should be cutting its target for the federal funds rate, labeling Powell as “stupid” for not doing so. Trump has indicated that the Fed should cut its target rate by 1 percentage point to 2.5 percentage points in order to reduce the U.S. Treasury’s borrowing costs. During World War II and the beginning of the Korean War, the Fed pegged the interest rates on Treasury securities at low levels: 0.375 percent on Treasury bills and 2.5 percent on Treasury bonds. Following the Treasury-Federal Reserve Accord, reached in March 1951, the Federal Reserve was freed from the obligation to fix the interest rates on Treasury securities. (We discuss the Accord in Chapter 13 of Money, Banking, and the Financial System.) Since that time, the Fed has focused on its dual mandate of maximum employment and price stability and it has not been directly concerned with affecting the Treasury’s borrowing cost.
Barring a sharp slowdown in the growth of real GDP, a significant rise in the unemployment rate, or a significant rise in the inflation rate, the FOMC seems unlikely to change its target for the federal funds rate before its meeting on September 16–17 at the earliest.
Today (May 30), the BEA released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2016, with inflation measured as the percentage change in the PCE from the same month in the previous year. In April, PCE inflation was 2.1 percent, down from 2.3 percent in March. Core PCE inflation in April was 2.5 percent, down from 2.7 percent in March. Headline PCE inflation was below the forecast of economists surveyed, while core PCE inflation was consistent with the forecast.
The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation increased in April to 1.2 percent from 0.1 percent in March. Core PCE inflation also increased from 1.1 percent in March to 1.4 percent in April. So, both 1-month PCE inflation estimates are well below the Fed’s 2 percent target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, because these data are for April, they don’t capture fully the price increases resulting from the tariff increases the Trump administration announced on April 2.
Fed Chair Jerome Powell has noted that inflation in non-market services has been high. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)
Headline market-based PCE inflation was 1.9 percent in April, unchanged from March. Core market-based PCE inflation was 2.3 percent in April, which was also unchanged from March. So, both market-based measures show about the same rate of inflation in April as the total measures do. In the following figure, we look at 1-month inflation using these measures. The 1-month inflation rates are both higher than the 12-month rates. Headline market-based inflation was 2.6 percent in April, up from 0.1 percent in March. Core market-based inflation was 3.1 percent in April, up from 1.2 percent in March. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.
In summary, today’s data provide some evidence that the inflation rate is getting closer to the Fed’s 2 percent annual target. Improving inflation combined with some indications that output growth is slowing—the BEA release indicated that growth in real consumption expenditures slowed in April—might make it more likely that the Fed’s policymaking Federal Open Market Committee (FOMC) will cut its target for the federal funds rate relatively soon.
However, investors who buy and sell federal funds futures contracts expect that the FOMC will leave its federal funds rate target unchanged at its next meetings on June 17–18 and July 29–30. (We discuss the futures market for federal funds in this blog post.) Investors assign a probability 0f 72.6 percent to the FOMC cutting its target at its September 29–30 meeting. Investor expectations reflect the recent statements from Fed Chair Jerome Powell and other members of the FOMC that they intend to wait until the effects of the tariff increases on the economy are clearer before changing the target for the federal funds rate.
Photo of Federal Reserve Chair Jerome Powell from federalreserve.gov.
As we discussed in a recent blog post, through the years a number of presidents have attempted to pressure Fed chairs to implement the monetary policy the president preferred. Although President Donald Trump nominated Jerome Powell to his first term as Fed chair—which began in February 2018—Trump has had many critical things to say about Powell’s conduct of monetary policy. Early in Trump’s current term, it seemed possible that he would attempt to replace Powell as Fed chair before the end of Powell’s second term in May 2026. Trump has stated, though, that he doesn’t intend to remove Powell. (As we discussed in this recent blog post, it seems unlikely that the Supreme Court would allow a president to remove a Fed chair because of disagreements over monetary policy.)
It’s not unusual for Fed chairs to meet with presidents, but until today (May 29) Powell had not met with Trump. When asked in a press conference on May 7 about a meeting with Trump, Powell responded that: “I don’t think it’s up to a Fed Chair to seek a meeting with the President, although maybe some have done so. I’ve never done so, and I can’t imagine myself doing that. It’s—I think it’s always—comes the other way: A President wants to meet with you. But that hasn’t happened.”
Today, Powell met with Trump after Trump requested a meeting. After the meeting, the Fed released this brief statement:
“At the President’s invitation, Chair Powell met with the President today at the White House to discuss economic developments including for growth, employment, and inflation.
Chair Powell did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook.
Finally, Chair Powell said that he and his colleagues on the FOMC will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective, and non-political analysis.”
According to an article in the Wall Street Journal, following the meeting, White House Press Secretary Karoline Leavitt stated that:
“The president did say that he believes the Fed chair is making a mistake by not lowering interest rates, which is putting us at an economic disadvantage to China and other countries. The president has been very vocal about that both publicly—and now I can reveal—privately, as well.”
Photo of Federal Reserve Chair Jerome Powell from federalreserve.gov
Can a president fire the chair of the Federal Reserve in the same way that presidents have been able to fire cabinet secretaries? President Donald Trump has had a contentious relationship with Fed Chair Jerome Powell. Powell’s term as Fed chair is scheduled to end in May 2026. At times, Trump has indicated that he would like to remove Powell before Powell’s term ends, although most recently he’s indicated that he won’t do so.
Does Trump, or any president, have the legal authority to replace a Fed chair before the chair’s term expires? As we discuss in Macroeconomics, Chapter 27 (Economics Chapter 17), according to the Federal Reserve Act, once a Fed chair is nominated to a four-year term by the president (President Trump first nominated Powell to be chair in 2017 and Powell took office in 2018) and confirmed by the Senate, the president cannot remove the Fed chair except “for cause.” As we’ve noted in previous blog posts, most legal scholars argue that a president cannot remove a Fed chair due to a disagreement over monetary policy.
But if the Fed is part of the executive branch of the federal government and the president is the head of executive branch, why shouldn’t the president be able to replace a Fed chair. Article I, Section II of the Constitution of the United States states that: “The executive Power shall be vested in a President of the United States of America.” The ability of Congress to limit the president’s power to appoint and remove heads of commissions, agencies, and other bodies in the executive branch of government—such as the Federal Reserve—is not clearly specified in the Constitution. In 1935, a unanimous Supreme Court ruled in the case of Humphrey’s Executor v. United States that President Franklin Roosevelt couldn’t remove a member of the Federal Trade Commission (FTC) because in creating the FTC, Congress specified that members could only be removed for cause. Legal scholars have presumed that the ruling in this case would also bar attempts by a president to remove members of the Fed’s Board of Governors because of a disagreement over monetary policy.
Earlier this year, the Trump administration fired a member of the National Labor Relations Board (NLRB) and a member of the Merit Systems Protection Board (MSPB). The members sued and an appeals court ordered the president to reinstate the members. The Trump administration appealed the order to the Supreme Court, which on Thursday (May 22) granted a stay of the order on the grounds that “the Government is likely to show that both the NLRB and MSPB exercise considerable executive power,” and therefore can be removed by the president, when the case is heard by the lower court. The ruling indicated that a majority of the Supreme Court is likely to overturn the Humphrey’s Executor precedent either in this case, if it ends up being argued before the court, or in a similar case. (The Supreme Court’s order is here. An Associated Press article describing the decision is here. An article in the Wall Street Journal discussing the issues involved is here.)
Does the Supreme Court’s ruling in this case indicate that it would allow a president to remove a Fed chair? The court explicitly addressed this question, first noting that attorneys for the two board members had argued that “arguments in this case necessarily implicate the constitutionality of for-cause removal protections for members of the Federal Reserve’s Board of Governors or other members of the Federal Open Market Committee.” But the majority of the court didn’t accept the attorneys’ argument: “We disagree. The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.” (We discuss the First and Second Banks of the United States in Money, Banking, and the Financial System, Chapter 10.)
We discuss the unusual nature of the Fed’s structure in Macroeconomics, Chapter 14, Section 14.4, where we note that Congress gave the Fed a hybrid public-private structure and the ability to fund its own operations without needing appropriations from Congress. Fed Chair Powell clearly agrees that the Fed’s structure distinguishes its situation from that of other federal boards and commissions. Responding to a question following a speech in April, Powell indicated that he believes that the Fed’s unique structure means that a president would not have the power to remove a Fed chair.
It’s worth noting that the statement the court issued had the limited scope of staying the appeals court’s ruling that the members of the two commissions be reinstated. If a case arises that addresses directly the question of whether presidents can remove Fed chairs, it’s possible that, after hearing oral and written arguments, some of the justices may change their minds and decide that the president has that power. It wouldn’t be unusual for justices to change their minds during the process of deciding a case. But for now it appears that the Supreme Court would likely not allow a president to remove a Fed chair.
Fed Chair Jerome Powell speaking at a press conference following a meeting of the FOMC (photo from federalreserve.gov)
Members of the Fed’s policymaking Federal Open Market Committee (FOMC) had signaled clearly before today’s (May 7) meeting that the committee would leave its target range for the federal funds rate unchanged at 4.25 percent to 4.50 percent. In the statement released after its meeting, the committee made one significant change to the wording in its statement following its last meeting on March 19. The committee added the words in bold to the following sentence:
“The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”
The key event since the last FOMC meeting was President Trump’s announcement on April 2 that he would implement tariff increases that were much higher than had previously been expected.
As we noted in an earlier blog post, an unexpected increase in tariff rates will result in an aggregate supply shock to the economy. As we discuss in Macroeconomics, Chapter 13,Section 13.3 (Economics, Chapter 23, Section 23.3), an aggregate supply shock puts upward pressure on the price level at the same time as it causes a decline in real GDP and employment. The result, as the FOMC statement indicates, can be both rising inflation and rising unemployment. If higher inflation and higher unemployment persist, the U.S. economy would be experiencing stagflation. The United States last experienced stagflation during the 1970s when large increases in oil prices caused an aggregate supply shock.
During his press conference following the meeting, Fed Chair Jerome Powell indicated that the increase in tariffs might the Fed’s dual mandate goals of price stability and maximum employment “in tension” if both inflation and unemployment increase. If the FOMC were to increase its target for the federal funds rate in order to slow the growth of demand and bring down the inflation rate, the result might be to further increase unemployment. But if the FOMC were to cut its target for the federal funds rate to increase the growth of demand and reduce the unemployment rate, the result might be to further increase the inflation rate.
Powell emphasized during his press conference that tariffs had not yet had an effect on either inflation or unemployment that was large enough to be reflected in macroeconomic data—as we’ve noted in blog posts discussing recent macroeconomic data releases. As a result, the consensus among committee members is that it would be better to wait to future meetings before deciding what changes in the federal funds rate might be needed: “We’re in a good position to wait and see. We don’t have to be in a hurry.”
The following figure shows, for the period since January 2010, the upper bound (the blue line) and lower bound (the green line) for the FOMC’s target range for the federal funds rate and the actual values of the federal funds rate (the red line) during that time. Note that the Fed is successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)
In his press conference, Powell indicated that when the committee would change its target for the federal funds rate was dependent on the trends in macroeconomic data on inflation, unemployment, and output during the coming months. He noted that if both unemployment and inflation significantly increased, the committee would focus on which variable had moved furthest from the Fed’s target. He also noted that it was possible that neither inflation nor unemployment might end up significantly increasing either because tariff negotiations lead to lower tariff rates or because the economy proves to be better able to deal with the effects of tariff increases than many economist now expect.
One indication of expectations of future changes in the target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) The data from the futures market indicate that investors don’t expect that the FOMC will cut its target for the federal funds rate at its May 17–18 meeting. As shown in the following figure, investors assign a 80.1 percent probability to the committee keeping its target unchanged at 4.25 percent to 4.50 percent at that meeting.
When will the Fed likely cut its target for the federal funds rate? As the following figure shows, investors expect it to happen at the FOMC’s July 29–30 meeting. Investors assign a probably of 58.5 percent to the committee cutting its target by 0.25 percentage point (25 basis points) at that meeting and a probability of 12.7 percent to the committee cutting its target by 50 basis points. Investors assign a probability of only 28.8 percent to the committee leaving its target unchanged.
An image generated by ChatGTP-4o of a hypothetical meeting between President Richard Nixon and Fed Chair Arthur Burns in the White House.
In a speech on April 15 at the Economic Club of Chicago, Federal Reserve Chair Jerome Powell discussed how the Fed might react to President Donald Trump’s tariff increases: “Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent…. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”
Powell’s remarks were interpreted as indicating that the Fed’s policymaking Federal Open Market Committee (FOMC) was unlikely to cut its target for the federal funds rate anytime soon. President Trump, who has stated several times that the FOMC should cut its target, was displeased with Powell’s position and posted on social media that “Powell’s termination cannot come fast enough!” Stock prices declined sharply on the possibility that Trump might try to fire Powell because many economists and market participants believed that move would increase uncertainty and possibly undermine the FOMC’s continuing attempts to bring inflation down to the Fed’s 2 percent target. Trump, possibly responding to the fall in stock prices, stated to reporters that he had “no intention” of firing Powell. In this recent blog post we discuss the debate over whether presidents can legally fire Fed chairs.
Leaving aside the legal issue of whether a president can fire a Fed chair, would it be better or worse for the conduct of monetary if the presdient did have that power? We review the arguments for and against the Fed conducting monetary policy independently of the president and Congress in Macroeconomics, Chapter 17, Section 17.4 (Economics, Chapter 27, Section 27.4). One key point that’s often made in favor of Fed independence is illustrated in Figure 17.12, which is reproduced below.
The figure is from a classic study by Alberto Alesina and Lawrence Summers, who were both economists at Harvard University at the time. Alesina and Summers tested the assertion that the less independent a country’s central bank, the higher the country’s inflation rate will be by comparing the degree of central bank independence and the inflation rate for 16 high-income countries during the years from 1955 to 1988. As the figure shows, countries with highly independent central banks, such as the United States, Switzerland, and Germany, had lower inflation rates than countries whose central banks had little independence, such as New Zealand, Italy, and Spain. In the following years, New Zealand and Canada granted their banks more independence, at least partly to better fight inflation.
Debates over Fed independence didn’t start with President Trump and Fed Chair Powell; they date all the way back to the passage of the Federal Reserve Act in 1913. The background to the passage of the Act is the political struggle over establishing a central bank during the early years of the country. In 1791, Congress established the Bank of the United States, at the urging of the country’s first Treasury secretary, Alexander Hamilton. When the bank’s initial 20-year charter expired in 1811, political opposition kept the charter from being renewed, and the bank went out of existence. The bank’s opponents believed that the bank’s actions had the effect of reducing loans to farmers and owners of small businesses and that Congress had exceeded its constitutional authority in establishing the bank. Financial problems during the War of 1812 led Congress to charter the Second Bank of the United States in 1816. But, again, political opposition, this time led by President Andrew Jackson, resulted in the bank’s charter not being renewed in 1836.
As we discuss in Chapter 14, Section 14.4, Congress established the Federal Reserve as a lender of last resort to bring an end to bank panics. In 1913, Congress was less concerned aboout making the Fed independent from Congress and the president than it was in overcoming political opposition to establishing a central bank located in Washington, DC. Accordingly, Congress established a decentralized system by having 12 District Banks that would be owned by the member banks in the district. Congress gave the responsibility for overseeing the system to the Federal Reserve Board, which was the forerunner of the current Board of Governors. The president had a greater influence on the Federal Reserve Board than presidents today have on the Board of Governors because the Federal Reserve Board included the secretary of the Treasury and the comptroller of the currency as members. Then as now, the president is free to replace the secretary of the Treasury and the comptroller of the currency at any time.
When the United States entered World War I in April 1917, the Fed came under pressure to help the Treasury finance the war by making loans to banks to help the banks purchase Treasury securities—Liberty Bonds—and by lending funds to banks that banks could loan to households to purchase bonds. In 1919, a ruling by the attorney general clarified that Congress had intended in the Federal Reserve Act to give the Federal Reserve Board the power to set the discounts rate the 12 District Banks charged member banks on loans.
Despite this ruling, authority within the Fed remained much more divided than is true today. Divided authority proved to be a serious problem when the Fed had to deal with the Great Depression, which began in August 1929 and worsened as the result of a series of bank panics. As we’ve seen, the secretary of the Treasury and the comptroller of the currency, both of whom report directly to the president of the United States, served on the Federal Reserve Board. So, the Fed had less independence from the executive branch of the government than it does today.
In addition, the heads of the 12 District Banks operated much more independently than they do today, with the head of the Federal Reserve Bank of New York having nearly as much influence within the system as the head of the Federal Reserve Board. At the time of the bank panics, George Harrison, the head of the Federal Reserve Bank of New York, served as chair of the Open Market Policy Conference, the predecessor of the current Federal Open Market Committee. Harrison frequently acted independently of Roy Young and Eugene Meyer, who served as heads of the Federal Reserve Board during those years. Important decisions could be made only with the consensus of these different groups. During the early 1930s, consensus proved hard to come by, and taking decisive policy actions was difficult.
The difficulties the Fed had in responding to the Great Depression led Congress to reorganize the system with the passage of the Banking Act of 1935. Most of the current structure of the Fed was put in place by that law. Power was concentrated in the hands of the Board of Governors. The removal of the secretary of the Treasury and the comptroller of the currency from the Board reduced the ability of the president to influence the Fed’s decisions.
During World War II, the Fed again came under pressure to help the federal government finance the war. The Fed agreed to hold interest rates on Treasury securities at low levels: 0.375% on Treasury bills and 2.5% on Treasury bonds. The Fed could keep interest rates at these low levels only by buying any bonds that were not purchased by private investors, thereby fixing, or pegging, the rates.
When the war ended in 1945, the Treasury and President Harry Truman wanted to continue this policy, but the Fed didn’t agree. The Fed’s concern was inflation: Larger purchases of Treasury securities by the Fed could increase the growth rate of the money supply and the rate of inflation. Fed Chair Marriner Eccles strongly objected to the policy of fixing interest rates. His opposition led President Truman to not reappoint him as chair in 1948,although Eccles continued to fight for Fed independence during the remainder of his time as a governor. On March 4, 1951, the federal government formally abandoned the wartime policy of fixing the interest rates on Treasury securities with the Treasury–Federal Reserve Accord. This agreement was important in eestablishing the Fed’s ability to operate independently of the Treasury.
Conflicts between the Treasury and the Fed didn’t end with that agreement, however. Thomas Drechsel of the University of Maryland has analyzed the daily schedules of presidents during the period from 1933 to 2016 and finds that during these years presidents met with Fed officials on more than 800 occasions. Of course, not all of these interactions involved attempts by a president to influence the actions of a Fed Chair, but some seem to have. For example, research by Helen Fessenden of the Federal Reserve Bank of Richmond has shown that in 1967, President Lyndon Johnson, who was facing reelection in 1968, was anxious that Fed Chair William McChesney Martin adopt a more expansionary monetary policy. There is some evidence that Johnson and Martin came to an agreement that if Johnson agreed to push Congress to increase taxes, Martin would pursue an expansionary monetary policy.
An image generated by ChatGTP-4o of a hypothetical meeting between President Lyndon Johnson and Fed Chair William McChesney Martin in the White House.
Similarly, in late 1971, President Richard Nixon was concerned that the unemployment rate was at 6%, which he believed would, if it persisted, endanger his chance of reelection in 1972. Dreschel finds that Nixon met with Fed Chair Arthur Burns 34 times during the second half of 1971. Evidence from tape recordings of Nixon’s conversations with Burns at the White House and from Burns’s diary entries indicate that Nixon pressured Burns to increase the rate of growth of the money supply and that Burns agreed to do so.
President Ronald Reagan and Federal Reserve Chair Paul Volcker argued over who was at fault for the severe economic recession of the early 1980s. Reagan blamed the Fed for soaring interest rates. Volcker held that the Fed could not take action to bring down interest rates until the budget deficit—which results from policy actions of the president and Congress—was reduced. Similar conflicts occurred during the administrations of George H.W. Bush and Bill Clinton, with the Treasury frequently pushing for lower short-term interest rates than the Fed considered advisable.
During the financial crisis of 2007–2009 and during the 2020 Covid pandemic, the Fed worked closely with the Treasury. The relationship was so close, in fact, that some economists and policymakers worried that the Fed might be sacrificing some of its independence. The frequent consultations between Fed Chair Ben Bernanke and Treasury Secretary Henry Paulson in the fall of 2008, during the height of the crisis, were a break with the tradition of Fed chairs formulating policy independently of a presidential administration. During the 2020 pandemic, Fed Chair Jerome Powell and Treasury Secretary Steven Mnuchin also frequently consulted on policy.
These examples from the Fed’s history indicate that presidents have persistently attempted to influence Fed policy. Most economists believe that central bank independence is an important check on inflation. But, given the importance of monetary policy, it’s probably inevitable that presidents and members of Congress will continue to attempt to sway Fed policy.
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