U.S. President Donald Trump and Federal Reserve Chair Jerome Powell in July during a tour of the Fed Board building in Washington.Kent Nishimura/Reuters
Lawrence L. Schembri is a senior fellow at the Fraser Institute and former deputy governor of the Bank of Canada.
The U.S. Federal Reserve is expected to stand pat on its rate decision on Wednesday. But the day will be marked by uncertainty of a different sort – it’s the first rate decision with the Fed chair under criminal investigation.
Earlier this month, the Trump administration’s Department of Justice unprecedentedly targeted Chair Jerome Powell. The probe was ostensibly to determine whether or not Mr. Powell misled Congress in his June, 2025, testimony about cost overruns for a Fed headquarters renovation project. It was the latest in a string of attacks on the Fed, as President Donald Trump tries to bend the institution to his will.
Mr. Trump’s efforts so far have not gone unnoticed by the markets. If the President succeeds in dominating the Fed, he risks worsening an already bad situation.
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The Fed is the most important and most powerful central bank in the world. It’s the bedrock on which global asset markets operate. Its commitment to low and stable inflation underpins the massive US$30-trillion market for U.S. treasuries and the use of the U.S. dollar as the global vehicle and reserve currency. In turn, the Fed’s credibility is based on its operational autonomy for monetary policy delegated to it by the United States Congress. By keeping average U.S. inflation to just above 2 per cent over the past 30 years, the Fed has helped promote economic growth and stability in the U.S. and around the world.
Since returning to the White House a year ago, Mr. Trump has tried to concentrate economic power in his office. He’s repeatedly disparaged the Fed, reflecting his resentment of its independence, and made baseless ad hominem attacks on Mr. Powell, while criticizing him and the Fed for not lowering interest rates further to stimulate economic activity. In fact, there’s no strong case for additional rate reductions because inflation has been above the Fed’s 2-per-cent target and economic growth in the U.S. has been stronger than expected. Although the unemployment rate rose to 4.4 per cent recently, it remains close to many estimates of the “natural” or sustainable rate of unemployment.
In September, Mr. Trump nominated one of his economic advisers, Stephen Miran, as a Fed governor. Since joining the Fed’s Open Market Committee (FOMC), Mr, Miran has been the only member (out of 12) to dissent in each of the FOMC’s last three decisions, voting for a 50-basis-point reduction in the Fed’s policy rate instead of the 25-basis-point cut approved by the majority. Mr. Trump has also tried, but failed, to fire Biden-appointed Fed governor Lisa Cook because of alleged mortgage fraud. The courts blocked her removal and the appeal now rests with the U.S. Supreme Court.
Trump’s escalating attack on the Fed draws pushback, muted market reaction
But the most serious threat to the Fed’s independence is the Department of Justice’s criminal investigation into Mr. Powell, and Mr. Trump’s plan to replace Mr. Powell as FOMC chair when his term expires in May, 2026, with someone who shares his preference for lower interest rates. (However, Mr. Powell, who has denied the allegations, could stay on as a Fed governor until his 14-year term expires in 2028).
There’s been much speculation about who Mr. Trump will nominate as the next Fed Chair, and this month he seemingly ruled out nominating Kevin Hassett, his top economic adviser. Mr. Trump also recently said it must be someone who “believes in lower interest rates, by a lot” and that “anybody that disagrees with me will never be the Fed Chairman.”
Mr. Trump’s efforts to undermine the independence of the Fed – coupled with the potential inflationary consequences of his One Big Beautiful Bill, which will add a projected US$3.4-trillion in federal debt over the next 10 years – have contributed to an 80-per-cent increase in gold prices and a 10-per-cent depreciation of the U.S. dollar over the past year. The 10-year Treasury rate has only declined by about 40 basis points over this same period, despite the 75-basis-point reduction in the Fed’s policy rate.
This deviation likely reflects an increase in inflation expectations or in risk premiums as major investors, such as sovereign wealth funds, continue to pare back their holdings, putting upward pressure on yields. This exodus could accelerate if credit rating agencies downgrade their ratings.
If Mr. Trump appoints his preferred candidate to replace Mr. Powell as Fed chair, and annual U.S. federal budget deficits remain sizable, we can likely expect more of the same: higher gold prices, a weaker U.S. dollar and higher U.S. Treasury yields – all driven by higher actual and expected U.S. inflation.
While a financial crisis is difficult to predict, especially given the central roles of the U.S. dollar and U.S. treasuries and the lack of adequate substitutes, one should keep in mind the adage of late economist Rudi Dornbusch, that crises take a much longer time coming than you think, and then they happen much faster than you would have thought.