Why have financial markets shrugged off Trump’s war on the Fed?

This might seem like a dramatic disconnect. Actually, however, the two groups have good reasons for responding differently.

Commentators concerned with the stability and integrity of US monetary policy have every reason to be horrified by Trump’s attempt to ‘fire’ Cook nearly 13 years before the expiry of her term. (Full disclosure: I directed Cook’s Ph.D. dissertation at the University of California, Berkeley.)

Members of the Board of Governors are appointed to long terms in office precisely to insulate them from political pressure.

Few laws of economics are better established than the proposition that central banks that are independent from politics do a better job of implementing monetary policy. They deliver lower and more stable inflation without visible costs in terms of higher and more variable unemployment.

Also read: Powell versus Trump: Why Fed independence matters in times of turmoil

There are also abundant counter-examples, mainly but not exclusively from emerging markets, where a political leader appoints a flunkey to lead the central bank, and the appointed flunkey then bows to the leader’s whims. As a general rule, these episodes turn out poorly.

Politicians care about the next election or public-opinion poll, and, given the power they can exercise, often try to manipulate monetary policy with such short-term goals in mind.

Central bankers, on the other hand, care about the credibility of the institution and those who run it. Credibility means consistently delivering what they promise. This anchors expectations and stabilizes economic outcomes.

The credibility of the Fed’s commitment to its 2% inflation target, for example, is what anchored American inflation expectations in recent years and allowed policymakers to bring inflation down without a visible increase in unemployment.

Attempting to fire sitting governors without good cause in order to replace them with flunkeys prepared to implement their political patron’s pet theory does not enhance that credibility.

This is as true of Trump’s theory that strong economic growth justifies lowering interest rates as it is of Turkish President Recep Tayyip Erdoğan’s theory that high interest rates cause inflation.

To be clear, independence does not mean lack of accountability. Nominees to the Fed Board of Governors must be confirmed by the US Senate. Members are regularly called by lawmakers to Capitol Hill in order to testify.

Still, one wonders about the readiness of the current US Congress to reject a Trump nominee or to criticize the policies of a Trump-dominated Fed.

This raises the worrisome spectre of Trump being able to ram through as many as three appointments to the seven-member board of governors over the next year, depending on how the Cook case turns out and what Fed Chair Jerome Powell decides to do when his term as chairperson expires in May.

Some commentators point out that two board members, Michelle Bowman and Christopher Waller, are already aligned with Trump on the current case for interest rate cuts.

This means, they suggest, that Trump needs only three additional seats before he possesses a majority on the Fed Board, allowing him to do as he pleases with US monetary policy.

That compliant majority could exercise its veto over the re-appointment of the 12 independent-minded regional Reserve Bank presidents, a rotating subset of whom serve on the interest-rate-setting Federal Open Market Committee (FOMC). At that point, dominance will be complete.

But we must not misunderstand the positions of Bowman and Waller. The FOMC’s decision at its last meeting on whether to cut interest rates or hold them steady, as it did, was finely poised.

The labour market is softening, which created a consistent argument for cutting rates. At the same time, inflation remains stubbornly above 2%, which is a reason for holding rates steady.

Bowman and Waller are experienced professionals who understand the importance of central-bank independence and the value of credibility. In that context, the fact that they dissented at the last meeting should be seen as reassuring, not alarming.

It is a reminder that whomever Trump appoints to replace Powell as Fed chair cannot assume that other members of the Board will rubber stamp his or her decisions.

At this point, the sanguine response of financial markets comes into focus. Even if Trump secures three appointees to the Fed Board next year, it is far from clear that he will be able to force through his policies.

After that, anything may be possible, including even more ‘firings’ and dubious appointments. But a year is about the limit of how far into the future investors are capable of looking. Financial markets are nothing if not myopic.

The rest of us, in contrast, have a responsibility to peer further into the future, as do American lawmakers and courts. If Cook can be defenestrated, why not others? This is why Trump’s attack is so alarming.

©2025/Project Syndicate

The author is professor of economics and political science at the University of California, Berkeley, and the author, most recently, of ‘In Defense of Public Debt’