Can the 112-year-old Fed wall stand up to its biggest test?

(Dan Tri) - For more than a century, the Fed has maintained independence as the foundation of the US economy. Now, that principle is being challenged as President Trump considers firing Chairman Jerome Powell.

The Golden Rule Is Challenged

On the evening of July 15 (Washington time), in the solemn space of the Oval Office, President Donald Trump is said to have discussed a draft letter to fire Fed Chairman Jerome Powell.

For many, it was the culmination of a personal feud. But for economists and historians, it was a far more deeply symbolic moment. It marked the most public and forceful challenge in modern history to a 112-year-old principle: central bank independence.

This principle is not a complicated law, but a simple but powerful idea: those with the power to “print money” should be separated from politicians with unlimited spending needs, especially before elections. Keeping monetary policy (interest rates, money supply) immune to short-term political pressures is seen as the “holy grail” of maintaining low inflation, stabilizing prices and giving global investors confidence.

Roger Altman, a former deputy secretary of the Treasury, has made a clear point: look at countries where the central bank is just an extension of the government , like Turkey or Argentina. The result is often hyperinflation, currency devaluation, and prolonged economic instability. The independence of the Fed is America’s bulwark against that path.

And now, that wall is showing its first cracks.

"For good cause" - an unsolved legal puzzle

The heart of this potential crisis lies in four words of the Federal Reserve Act: “ for cause.” This is the only condition that allows the President to fire a member of the Fed’s Board of Governors.

The problem is, “just cause” has never been clearly defined. Historically, it has been understood to mean serious, undeniable wrongdoing like corruption, fraud, or criminal violations. Disagreeing on whether to raise or lower interest rates by 0.25% is certainly not one of them.

The administration is looking to build a “legitimate case” for replacing the Fed’s leadership, according to several sources familiar with the matter, as it investigates the $2.5 billion renovation of the central bank’s headquarters. Allegations of capital overruns, lack of transparency or possible financial misconduct could be used as a legal justification for the upcoming action.

But legal experts warn that this is a risky strategy. According to Professor Peter Conti-Brown of the University of Pennsylvania, courts will not only evaluate the reason given on the surface, but also the real motive behind it. If the court finds that the replacement of the Fed leader stems from a disagreement over the direction of monetary policy rather than an actual violation, the pretext related to the renovation project may be considered a “pretext” and rejected.

But nothing is certain. This confrontation is pushing the US judicial system into “unprecedented legal territory”. The Supreme Court, in a recent ruling, deftly avoided defining the president’s power over the Fed, noting only that it is a “specially structured entity”.

This legal battle, if it comes to pass, would be about more than just Mr. Powell’s fate. It would be a landmark case, potentially redrawing the lines of power between the White House and the Fed for generations to come.

US President Donald Trump has repeatedly given mixed signals about the possibility of firing Federal Reserve (Fed) Chairman Jerome Powell (Illustration: Getty).

Echoes from history

Tensions between a president and a Fed chairman are nothing new. American history has seen many quiet but fierce confrontations.

In early 1970, President Richard Nixon put tremendous pressure on Fed Chairman Arthur Burns to keep interest rates low to support his 1972 re-election bid. Many economists later argued that this easy monetary policy helped spark the "Great Inflation" that lasted for a decade.

By contrast, in early 1980, Fed Chairman Paul Volcker had to make some painful decisions, pushing interest rates to record levels above 20% to break the backbone of inflation. This policy caused a deep recession and skyrocketing unemployment, creating enormous political pressure. But President Ronald Reagan, despite fierce opposition, publicly supported Volcker’s independence. He understood that such a bitter pill was necessary for the long-term health of the economy.

These historical accounts reveal an unwritten rule: Presidents can complain, they can pressure, but they have never crossed the final line—firing a Fed chairman for their policies. It is a “gentleman’s agreement” that has been respected by presidents of both parties.

This confrontation is particularly dangerous because it threatens to break the “tacit agreement” that has lasted for more than a century that the president can exert pressure but not directly intervene in monetary policy. If replaced because of policy disagreements, the Fed chair would become a political position where loyalty could override economic expertise.

Jon Hilsenrath, a senior adviser at StoneX, warned that any move to weaken the Fed’s independence could undermine market confidence in the central bank’s commitment to controlling inflation, leading to financial instability. Some sources also said Trump is looking for a Fed chairman who is willing to listen to his demands for rate cuts, which could push the Fed away from its decades-long protected neutrality.

Why is this institutional battle important?

The battle for control of the Fed in Washington may seem distant, but its implications are close to home for every citizen and business. The independence of the Federal Reserve is not a vague concept but the backbone that keeps the currency stable, markets running smoothly and the economy insulated from short-term political shocks.

For investors, uncertainty at the top of the Fed is a nightmare. Wall Street can tolerate bad news, but it cannot tolerate ambiguity. If the Fed chair becomes politicized, confidence in policy direction will be shaken, capital may be withdrawn and markets will spiral into chaos.

Is the 112-year-old bulwark of central bank independence strong enough to weather the current storm? (Photo: JP Morgan).

For businesses, uncertainty about monetary policy makes everything from factory expansion to hiring more staff risky. How can you make investment decisions if you don’t know what the cost of borrowing will be in the next few months?

For consumers, every decision the Fed makes directly affects interest rates on mortgages, auto loans, and credit card spending. A politically manipulated Fed may be lenient before an election, but the price it pays is rising inflation and eroded consumer purchasing power.

Furthermore, the dollar’s ​​status as the world’s reserve currency rests on confidence in the Fed’s stability and independent expertise. If that confidence were to collapse, America’s economic standing would be dragged down with it.

The world is watching, not just out of curiosity, but because the implications could ripple far into every wallet, every savings account and every future plan.

Source: https://dantri.com.vn/kinh-doanh/buc-tuong-112-nam-tuoi-fed-co-dung-vung-truoc-thu-thach-lon-nhat-20250720165425184.htm