Divided Congress threatens Fed independence more than Trump
An analysis argues that political gridlock in Congress presents a larger risk to the Federal Reserve's independence than actions by President Donald Trump. While Trump has voiced criticisms of Fed Chair Jerome Powell, he has not attempted to remove him or directly interfere with monetary policy. The real danger lies in congressional battles over fiscal policy that could pressure the central bank.
The Federal Reserve's independence is a cornerstone of U.S. monetary policy, designed to insulate decisions on interest rates and inflation from short-term political pressures. Established in the wake of the Great Depression, this autonomy has helped maintain economic stability for decades. However, recent commentary highlights that the greatest threat to this independence may not come from the executive branch but from legislative dysfunction.
In an opinion piece published by MarketWatch, Rex Nutting contends that 'the biggest risk to the independence of the Federal Reserve isn’t Donald Trump, it’s a divided Congress.' Trump has frequently lambasted Fed Chair Jerome Powell, calling him an 'enemy' and criticizing rate hikes during his presidency. Despite this rhetoric, Trump has refrained from more aggressive moves. 'Trump has not tried to fire Powell, nor has he interfered with the Fed’s decisions,' Nutting writes, noting that Powell's term extends until 2026, and any dismissal would require cause under the Federal Reserve Act.
The analysis shifts focus to Congress, where partisan divisions could erode Fed autonomy through fiscal chaos. A divided legislature, as seen in the narrowly split House and Senate following recent elections, risks repeated standoffs over the debt ceiling and government funding. The 2023 debt ceiling crisis, which brought the U.S. economy to the brink of default, exemplifies this peril. Such episodes force the Fed into reactive roles, potentially compromising its ability to focus on long-term goals like price stability and full employment.
Nutting draws on historical precedents, such as the 2011 debt ceiling debacle, which led to a credit rating downgrade and market turmoil. These fiscal fights can spill over into monetary policy, with lawmakers pressuring the Fed to monetize deficits or ease rates to offset congressional inaction. 'A divided Congress is more likely to politicize the Fed’s role in managing the economy,' the piece argues, emphasizing that sustained gridlock could undermine public trust in the central bank's impartiality.
Experts echoed these concerns in related discussions. Former Fed Governor Kevin Warsh has warned that fiscal dominance—where Congress's spending overwhelms monetary control—poses an existential risk. While Trump's potential return to office might renew verbal attacks, the structural threat from Capitol Hill appears more insidious. The piece concludes that restoring bipartisanship in Congress is essential to safeguard the Fed's vital independence amid rising national debt and economic uncertainties.