Jerome Powell’s tenure as chair of the Federal Reserve is winding down, and the Kevin Warsh era is nigh. But President Donald Trump seems intent on intimidating Powell until the bitter end, making the transition as difficult and volatile as possible. That malicious impulse will cause lasting institutional damage to the world’s most important central bank.
On Tuesday, Justice Department officials made an unannounced visit to the central bank’s offices as part of an ongoing investigation into cost overruns related to building renovations, according to a Wall Street Journal report. The latest salvo is just another chapter in a thinly veiled effort to punish Powell for not lowering policy rates, as Trump would prefer, despite now rising headline inflation. The officials were turned away from the active construction site over safety and clearance protocols, Bloomberg News reported.
Shortly after those reports, Fox Business broadcast an interview on Wednesday in which Trump signaled he’d push for the investigation to continue and would seek to fire Powell if he doesn’t step away from his post in time (presumably by May, when his term is technically over). “I’ll have to fire him, OK, if he’s not leaving on time,” Trump said.
Transition Under Siege
Trump can’t seem to stop needling the Fed chair, but to what end?
Powell is scheduled to leave the role in about a month, and Warsh, his would-be replacement, is set for a confirmation hearing with the Senate Banking Committee on Tuesday. All signs suggest that Trump could have his chosen Fed chair in place by mid-May if he would simply allow the transition to play out in a normal and orderly manner. Yet, he inexplicably refuses to do so. By behaving in this manner, he’s both eroding central bank independence and undermining his own stated objectives.
North Carolina Republican Thom Tillis has signaled he will block Warsh’s confirmation until the investigation is over — not because he has anything against Warsh, but because he wants this charade to end. (After news of the prosecutors’ visit, Tillis posted a photo of the Three Stooges on X, along with the caption: “The U.S. Attorney’s Office for D.C. at the crime scene.”)
Likewise, Powell — who can technically stay on the Fed’s Board of Governors until 2028, even after his term as chair ends — has said he will break with recent precedent and stick around as a governor until the DOJ inquiry is “well and truly over,” apparently his way of protecting the Fed’s independence. In addition to the attack on Powell, Trump has also sought to push out Fed Governor Lisa Cook, and Powell’s presence helps pad the rate-setting committee against such attacks, with a critical mass of independent technocrats.
What’s more, if Warsh hasn’t been confirmed, Powell has said that he would act as chair pro tempore. That could lead to lead to a legal clash in the weeks ahead if Trump tries to intervene. All in all, it’s clear that Trump is fighting for the sake of fighting, without a logical endgame. Nobody stands to win — not Trump, not Warsh and certainly not the American people.
It’s also worth noting that Trump has been demanding sharply lower policy rates since his return to office, and it’s policymakers’ judicious decision to move slowly that has instead been vindicated. During that time, inflation has stubbornly refused to converge on the Fed’s 2% target, and it’s now started to move higher again as the US-Israeli conflict with Iran pressures energy prices.
Central Bank Autonomy
Over time, independent central banks deliver the best outcomes for households, including lower inflation and more sustainable economic growth. When central banks fall under political influence, officials tend to juice growth in election years and ignore the long-run inflationary consequences to everyone’s detriment. The integrity of leadership transitions is one important part of that.
Evidence from 28 economies shows that politically motivated changes in central bank leadership are predominantly an emerging-market phenomenon, according to an IMF working paper published last month by Marijn A. Bolhuis, Rui C. Mano and Hedda Thorell. In developing nations since 2000, 48% of transitions were politically motivated, while only 13% classified as such in developed markets, according to the paper, “The Macroeconomic Consequences of Undermining Central Bank Independence: Evidence from Governor Transitions.” Trump is single-handedly helping to lower America’s standards of central bank transitions to the levels of India and Argentina, two of the developing countries named in the paper.
Ultimately, the most important question is still how Warsh carries himself as Powell’s successor. In his bid to win the nomination, the erstwhile hawk (known for years as a harsh critic of the Fed’s large balance sheet) has reinvented himself as a rate-cutting dove and, in so doing, ingratiated himself with the president. Yet, he still has many supporters who point to his years of service at the central bank during the financial crisis; and with inflation on the rise, many of his backers suspect he’ll find the spine to confront Trump once he’s safely confirmed for the job.
Even if that’s the case, Trump’s efforts to undermine the transition itself will leave a lasting mark on the history of the Fed, and Americans will pay for his reckless assault on Fed independence for years to come.