The battle between the White House and the Federal Reserve’s leadership has gained more attention with Elon Musk’s involvement. Chairman Powell may win legally, but ensuring the Fed’s independence could be challenging.

According to The New York Times, U.S. President Donald Trump is threatening the independence of the Federal Reserve with the White House’s influence and even considering firing Fed Chairman Jerome Powell, sparking concerns among Wall Street experts.

Recently, the White House’s threat gained momentum when Elon Musk, the world’s wealthiest individual and a staunch Trump supporter, retweeted Republican Senator Mike Lee’s post with a “100%” symbol, endorsing the idea of dismantling the Fed.

The Fed’s future remains one of the most closely watched issues following Trump’s election.

What is the Fed?

The Fed has supervised the U.S. financial system for over a century.

Before the Fed was established, the collapse of even a local bank could lead to nationwide panic. Bank runs were common and had long-lasting repercussions. American bankers recognized the problem.

During the banking crisis of 1907, U.S. bankers sought help from the only person who could rescue them: J.P. Morgan, then the king of Wall Street. Today, the bank he founded, J.P. Morgan Chase, is the largest bank in the U.S.

In October 1907, Morgan gathered the era’s leading bankers at his office on 23 Wall Street. With capital from these banks, he saved healthy banks at risk of collapse. By 1913, a new law was passed, and the Fed was considered a miracle of compromise, meeting the diverse interests of all stakeholders.

The Fed Chair serves a four-year term and testifies before Congress twice a year on monetary policy.

The Fed is unlike any other central bank globally. It consists of a network of 12 regional banks, each run by local bankers and business leaders. The unique aspect of the Fed’s structure is that each regional reserve bank operates as a private corporation with its own stock.

By law, all banks in the U.S. must hold stock in their regional reserve bank to qualify as a member bank, which in turn provides them with an equivalent share in the regional reserve bank.

Will Trump End the Fed’s Independence?

After over a century, the Fed’s independence has been shaken. Recently, Republican Senator Mike Lee accused the central bank of “economic manipulation,” directly contributing to the economic hardship facing Americans today.

On the platform X, he emphasized that he wants the Fed to be under presidential control—a view Musk supports.

According to Wall Street Journal writer Nick Timiraos, if the White House seeks greater control over the Fed, Powell could potentially sue. Trump appointed Powell in 2017 but soon considered firing him.

“The Fed chair still holds his position but is prepared to oppose Trump if he takes further action,” Timiraos wrote.

Timiraos noted that Trump was furious when the Fed raised interest rates against his wishes. For Powell, engaging in a legal battle is essential to prevent future Fed chairs from facing dismissal over policy disagreements.

In fact, Powell has emphasized multiple times that the president does not have the authority to remove the Fed chair. Last week, he affirmed he would not resign if Trump requested it, stating that his dismissal would be “illegal.”

Wall Street experts are also concerned about any effort to weaken the Fed’s independence, as it could erode investor confidence in the stock and bond markets.

The White House Council of Economic Advisers has stated that independence is essential for fighting inflation and promoting economic growth.

“If the president succeeds (in influencing the Fed), future Fed chairs could be removed at the president’s discretion,” the New York Times quoted former Fed counsel Scott Alvarez as saying. “I believe Powell wouldn’t want this to happen. It’s a turning point,” he emphasized.

President Trump is angry when the Fed makes policy decisions contrary to his wishes. Photo: Reuters.

“The Fed’s Biggest Mistake in 40 Years”

In recent years, Powell has faced criticism for being slow to address inflation, leading to rapid interest rate hikes and instability in the banking system.

Last year, Mohamed El-Erian, Chief Economic Adviser at Allianz, stated that Powell made “the biggest mistake in 40 years.”

“They have to cool inflation, reduce banking sector tensions, and avoid a recession simultaneously. Balancing this is challenging because the Fed was late in raising rates,” he argued, pointing to the Fed’s slow response to inflationary pressures caused by pandemic-related economic stimulus.

Powell has been criticized for his slow policy response during the U.S. economic recovery post-COVID-19.

The collapse of regional banks in the U.S. last year is partly attributed to the Fed’s rapid rate hikes. As interest rates rose, the value of long-term treasury bonds fell, making it difficult for banks to raise cash to repay depositors.

Mr. Powell was criticized for his slow policy response as the US economy recovered from the Covid-19 crisis. Photo: Reuters.

What Will Be the Outcome of This Battle?

With the support of most Senate Republicans and the Supreme Court, Trump could challenge the Fed’s power in 2025.

Legal challenges persist. Powell could potentially finance a legal battle himself. Recently, the U.S. Supreme Court declined to hear a case that threatened the independence of the Consumer Product Safety Commission.

Conversely, Benn Stell, Director of International Economics at the Council on Foreign Relations, noted that even if Powell wins the battle with Trump, he might still struggle to maintain the Fed’s independence under Trump’s presidency.

The president has multiple ways to influence policy decisions, including through the Federal Open Market Committee (FOMC), which has the authority to implement monetary policy.

Five of the 12 FOMC members are regional Federal Reserve Bank presidents and operate outside White House control. However, the president can still impact monetary policy through a smaller group of FOMC members. The Fed’s Board of Governors has seven members appointed by the U.S. president, providing an avenue for Trump to exert influence.