The Populist Threat to Monetary Policy: The Economics of Trump's Attacks on the Fed

Last month President Trump wrote to Lisa Cook, one of the seven members of the Federal Reserve’s Board of Governors, informing her that she was being dismissed with immediate effect, citing allegations of mortgage fraud. Cook has refused to go quietly, filing a lawsuit against what she calls the President’s “unprecedented and illegal” attempt to remove her. This episode is the latest in a string of attacks by Trump on the Fed: from branding Chair Jerome Powell a “numbskull” for not cutting interest rates quickly enough, to trying to remove Powell before his term expires.

The purpose of these interventions is clear: to pressure the Fed into loosening policy more aggressively, including by reshaping the Board of Governors with a majority of Trump appointees. That strategy strikes at the heart of central bank independence. Independence matters because it insulates interest-rate decisions from the political cycle, making it more likely that policy reflects the needs of the economy rather than the electoral calendar.

Attacks on Fed independence could affect the US and global economy in many ways — including, at the extreme, by undermining the credibility of the US macro-financial framework and threatening the dollar’s reserve-currency role. Here I focus on two channels that are more immediate.

Monetary policy shocks

The first, and in some ways the most straightforward, is that public criticism by the President and attempts to pack the Board of Governors with loyalists could lead the Fed to set lower interest rates than it otherwise would, regardless of economic conditions. In economists’ jargon, this is a monetary policy shock — a temporary departure from the central bank ’s usual reaction to inflation and growth. The effects are familiar from decades of research: output rises, inflation picks up, and short-term rates stay lower for a time, before the Fed eventually reverts to its normal policy stance .

This isn’t the only way such a monetary policy shock could play out. If investors come to expect that the Fed will set rates persistently looser – for years rather than months – then the situation changes. In standard models, this looks like an intercept shock, which is mathematically equivalent to the Fed lowering its inflation target. That sounds counter-intuitive: lower rates associated with lower inflation. But this is basically like saying if the Fed always sets rates below where the data would suggest, markets will infer it must be trying to engineer lower inflation on average, otherwise it wouldn’t be able to set those lower rates in the first place. Expectations of lower inflation then push up real interest rates, depressing demand, output, and ultimately inflation itself.

I would not take that precise model prediction literally. But they do suggest a potential countervailing force to the expansionary effects of pressure to lower interest rates.

Trust shocks

A second, and less well-understood, channel is through damage to the public’s trust in the Fed. We know far less about this than about conventional monetary policy shocks. In a recent paper with Francesca Monti and Shunshun Zhang, I analyse what happens when trust in the Fed takes a hit. We find that such “trust shocks” create an awkward trade-off: expected inflation rises, while economic activity falls persistently. In other words, political pressure doesn’t just push rates lower — it undermines the institution itself, adding a further drag on growth.

In our data, President Trump’s first-term attacks were especially damaging. As the chart below shows, our measure of trust in the Fed fell sharply from early 2018, coinciding with a period when Trump was particularly active on Twitter/X criticising the institution. The decline was only halted by the onset of the pandemic, when the Fed’s emergency policies were a visible part of the economic life-support system.

The direct economic effects we estimate are modest — worth a few basis points in higher expected inflation. But the bigger concern is not captured in our data. If the stock of public trust in the Fed erodes, the institution’s ability to act decisively in the next crisis could be compromised. When the time comes to launch large-scale asset purchases to calm markets, will the Fed be less likely to act?

A natural question is why financial markets show so little sign of concern. Standard gauges of longer-term inflation expectations such as five-year forward break-evens are essentially unchanged, suggesting investors see no lasting shift in the Fed’s credibility.

There are a few possible explanations. Markets are notoriously bad at pricing extreme institutional risks until they are right in front of them — think of euro area sovereign Credit Default Swap premia before the global financial crisis. Investors may also believe that Trump will ultimately back down, or that the courts will block any unlawful interventions.

But that complacency itself is a risk. If political interference in the Fed does escalate, asset prices could reprice abruptly rather than gradually. For now, this remains a downside scenario that markets are largely ignoring.

The question is why this matters for the UK – beyond the usual “when America sneezes, Europe catches a cold” cliché. In recent months, Reform UK, through deputy leader Richard Tice, has echoed the populist tone of Trumpism by openly challenging the Bank of England’s independence. In a letter to Governor Andrew Bailey, Tice proposed that Treasury officials should sit as voting members of the Monetary Policy Committee.

The UK’s institutional safeguards are strong. Under the Bank of England Act 1998, external members of the MPC are appointed by the Chancellor for staggered three-year terms (renewable once), and can be removed only for “inability or misbehaviour”. But the risk here isn’t just defined by what the law allows. Once political intervention in monetary policy enters the Overton window, even formal statutory protections might not provide sufficient protection.

Mervyn King once observed that the years before the global financial crisis would be remembered as the “high-water mark” of central bank independence. Since then, the burden placed on central banks — first in stabilising finance, then in rescuing economies, now in managing climate and distributional debates — has made them more exposed to politics. Trump’s attacks on the Fed are the most visible expression of that shift. But the broader lesson is clear: independence is not a permanent entitlement. It is a political settlement that has to be defended, explained, and justified. If the Fed’s independence can be eroded, the Bank of England’s could be too.