Federal Reserve Chair Jerome Powell is facing pressure from all sides as the Fed’s banking regulation conference kicks off this week.
President Trump has been threatening to fire Powell while telling him to cut interest rates, but the Fed has been holding off as Trump’s tariffs have started to push up prices.
Potential successors to Powell as Fed chair have been backing up Trump’s criticisms of Fed policy. At the same time, top private-sector bankers have been sounding notes supportive of Powell and of the Fed’s political independence.
Beneath the political fracas over Powell’s chairmanship, the Fed is spurring controversy at the policy level as it considers whether to loosen some key financial regulations just two years after major bank failures rattled the industry.
Here’s a look at the different political forces now bearing down on the Fed.
The battle over interest rate cuts
The main pressure facing the Fed now is the disagreement it has with the White House over the path of interest rates.
The Fed started cutting rates last year after keeping them elevated in response to postpandemic inflation, but it paused the cuts after prices ticked up over the fall and as price pressures from Trump’s tariffs loomed on the horizon.
Powell said last month that were it not for the tariffs, the Fed would have already resumed its cuts, putting monetary policy squarely at odds with White House trade policy.
Trump encouraged rate cuts again last week, saying the Fed should cut them by a full 3 percentage points.
Such a move would make it cheaper for banks to lend money, which would encourage investment and likely increase company valuations in financial markets.
But it could also allow firms to raise their prices, spurring inflation that’s already riding a tailwind from Trump’s tariffs, which are being passed along to consumers as a cost. Inflation jumped to a 2.7 percent annual increase in June from 2.4 percent in May, according to the Labor Department.
“I know better than anybody what’s good for the market, and what’s good for the U.S.A,” Trump fumed on social media over the weekend. “If it weren’t for me, the market wouldn’t be at record highs right now.”
Trump’s comments came in response to a Sunday Wall Street Journal story that reported that Treasury Department Secretary Scott Bessent personally tried to talk Trump out of firing Powell.
Bessent downplayed his own advice to the president and said it’s ultimately Trump’s decision to make.
“President Trump solicits a whole range of opinions and then makes a decision. So, he takes a lot of inputs, and at the end of the day, it’s his decision,” Bessent told CNBC on Monday.
Despite Trump’s anger and Bessent’s placations, legal experts doubt that the president has the authority to forcibly remove a standing chair of the Fed’s board of governors.
Controversy over the Fed’s building renovation
The Trump administration’s frustration with Powell has boiled over into other areas of Fed operations, notably the central bank’s ongoing $2.5 billion renovation of its Marriner S. Eccles building in Washington, which has seen a cost runover.
The renovation entails a complete overhaul of buildings that haven’t been significantly renovated since the 1930s, the Fed says.
Office of Management and Budget Director Russell Vought said earlier this month that Powell’s recent testimony to Congress about the renovation suggested it was “out of compliance” with approved plans.
Trump said last week it was “highly unlikely” that he would fire Powell — “unless he has to leave [for] fraud.”
Critics of the president say Trump is using the renovation as an excuse to fire Powell over the interest rate disagreement and his unwillingness to bend to Trump’s demands.
Sen. Elizabeth Warren (Mass.), the top Democrat on the Senate Banking Committee, labeled the move a “pretext.”
While Warren led the Democratic effort to oppose Powell’s renomination during the Biden administration, she has set her policy differences aside in defense of the Fed’s independence.
“Nobody is fooled by this pretext to fire Chair Powell. And markets will tank if he does,” Warren said last week during a speech at the Exchequer Club.
Bankers are backing Powell
Top bankers in the private sector are defending the traditional independence of the Federal Reserve, an argument that backs up Powell’s chairmanship by extension.
JPMorgan Chase CEO Jamie Dimon said last week that the Fed should be left out of politics.
“I think the independence of the Fed is absolutely critical,” he said. “Playing around with the Fed can have adverse consequences, the absolute opposite of what you might be hoping for.”
Bankers with Goldman Sachs, Bank of America and Citigroup followed Dimon’s lead.
“The Fed was set up to be independent and have a dual mandate,” Bank of America CEO Brian Moynihan said on CNBC last week. “A stable central bank is really very important.”
Moynihan added that markets would respond negatively if the head of the Fed were removed “prematurely.”
Rivals to Powell are jockeying for position
While bank chiefs are giving tacit cover to Powell, hopefuls for the Fed’s top position are singing a very different tune about Fed independence, taking it down a peg in a way that lines up with Trump’s recent criticisms.
Former Fed board of governors member Kevin Warsh last week went so far as to suggest “a new accord” to replace the 1951 agreement between the Fed and the Treasury Department that split up the duties of debt issuance and monetary policy.
Warsh suggested that the Fed and the Treasury Department could communicate moves regarding the Fed’s balance sheet in coordination with each other.
“If we have a new accord, and … the Fed chair and the Treasury secretary can describe to the markets plainly and with deliberation this is our objective for the size of the Fed’s balance sheet, the Treasury can say this is our issuing calendar, and by the end of, let’s say, this administration, we’ll be at an equilibrium rate on the balance sheet, so that markets will know what is coming,” Warsh told CNBC, according to Reuters.
Fed board member Christopher Waller told Bloomberg News on Friday that he would chair the Fed’s Open Market Committee if Trump asked him to.
“If the president contacted me and said, ‘I want you to serve,’ I would do it. But he has not contacted me,” Waller said.
Waller has also suggested that he might vote to lower interest rates at the Fed’s next rate-setting meeting later this month, a move that would be in line with Trump’s wishes.
“I dissented on the balance sheet slowdown earlier this year because I felt like that was not needed, and that’s kind of the situation we’re in now,” he told Bloomberg on Friday.
The Fed is getting ready to loosen banking regulations
At the policy level, the Fed is also facing controversy as it considers whether to loosen banking regulations.
The Fed is weighing changes to its leverage ratio and bank stress tests after it declined to implement the full range of reforms in the aftermath of the 2007-2008 financial crisis that started the Great Recession.
The Fed says that allowing banks to borrow more money relative to their capital will allow them to buy more U.S. bonds.
“We want to ensure that the leverage ratio does not become regularly binding and discourage banks from participating in low-risk activities, such as Treasury market intermediation,” Powell said in a statement last month.
Warren said this move is more about increasing bank profitability than it is about bond buying.
“[It’s] a move that frees up money to line the pockets of Wall Street shareholders and executives while reducing capital available for lending, protecting depositors, and preventing megabank failures,” she wrote in a recent letter to the top Fed regulator, Vice Chair of Supervision Michelle Bowman.
The Fed has been lollygagging on international capital requirements as formulated in the Basel III agreement, a standard that the bank has been talking about putting into place for years.
In June, Powell said the Fed was considering “a fresh start” on it.
“We’re going to take a fresh start at that,” he told the Senate Banking Committee in June.
Critics of the financial industry pin the Fed’s failure to implement the 15-year-old Dodd-Frank reforms on the sector’s lobbying.
“The financial industry has launched well-funded lobbying and litigation efforts to prevent the regulators from implementing the remaining Dodd-Frank safety and soundness rules and now the administration and Congress are trying to unravel existing protections as well,” the Americans for Financial Reform advocacy group said in a statement to the House Financial Services Committee in June.
The Fed did not return a request for comment on the status of the implementation of the Basel III reforms.
