Now that the Federal Reserve has cut interest rates at its final meeting of the year, two hugely important, interrelated questions remain unresolved for 2026: Who will be the next Fed Chair and will the Fed remain independent?
Given the Trump administration's repeated public attacks on the Fed, we often take the central bank's independence for granted. But it was hard won.
The big breakthrough came in 1951. Decades earlier, the Fed had functioned largely as an appendage of the Treasury Department and the White House—and during World War II, it was a passive enabler of the policies of the Roosevelt and Truman administrations, keeping interest rates artificially low to finance the war's deficit spending. By February 1951, inflation had risen to over 20 percent, a disastrous development that the Fed blamed on the executive branch.
After major political disputes culminated in March 1951 in an agreement now known as the Treasury-Fed Agreement, the Fed ensured that it would no longer have to obey the orders of the Treasury and the White House but would operate on its own terms as an independent central bank. It could raise short-term interest rates to curb inflation if it deems this politically unpopular step necessary, and it would no longer be required to keep bond market rates artificially low.
However, this battle for control of US monetary policy never quite ended. It is now being played out again in a series of contentious public battles, with huge implications for the cost of living, the dollar and the risks long-term investors must bear.
Echoes of the past
President Trump said he will nominate a nominee next month to replace Jerome H. Powell, the embattled Fed chairman who has not cut interest rates as much as the president would have liked. Candidate interviews are underway, but Kevin A. Hassett, the director of the White House Economic Council, is said to be the front-runner. He has gone out of his way to support Mr. Trump's position on interest rates and much else.
But he recently told the Wall Street Journal that if he were Fed chief, he would think for himself and “just do the right thing.” Mr. Hassett added that he would not cut interest rates if the president ordered it at an inconvenient time – reaffirming a degree of Fed independence.
Separately, the Supreme Court is expected to weigh in on the Trump administration's efforts to replace Lisa Cook as Fed governor and whether the president has the right to fire Mr. Powell and control the Fed.
Why does this all matter? While close cooperation between the Fed and the Treasury is often essential, economists almost agree that central banks work best when they are not beholden to politicians. “The principle that a central bank tasked with controlling inflation should be independent of the government is unassailable,” Janet Yellen said in 2009, when she was still president of the Federal Reserve Bank of San Francisco. She later became Fed Chair and then Treasury Secretary, and her views on that point never changed.
The Trump administration has not always adhered to this principle. After reading a bit of history, I found it striking how closely the Fed's problems with the Trump administration resemble those of the late 1940s and early 1950s under President Harry S. Truman, a Democrat.
Former chairman turned rebel
The Fed's main building — which President Trump says is undergoing lavish renovations under Mr. Powell's leadership — was named after a key player in the Fed's fight for independence, Marriner S. Eccles. The fascinating thing is that Mr. Eccles lost his job as Fed chairman, but stayed on as Fed governor and became a frontrunner in the fight with the White House.
Updated
Stepping down as chairman but remaining governor is a step Mr. Powell could theoretically take next year, but he declined Wednesday to say whether he would do so. While his term as chairman expires in May, his term as Fed governor could last until January 2028. Deutsche Bank cited the Eccles example in a recent research note: “Could Jerome Powell follow the Marriner Eccles precedent?”
“Given President Trump’s past actions and his stated desire for greater influence over Fed policy,” emphasized Peter Hooper and Matthew Luzzetti, the note’s authors, “Jerome Powell may view remaining on the Board of Governors as critical to maintaining the Fed’s independence by providing stability and continuity amid potential political pressures.”
Mr. Eccles provided more than stability and continuity. As Fed governor in late 1950 and early 1951, he played a much more aggressive role in fighting the administration than then-Chairman Thomas B. McCabe.
Mr. Eccles even went so far as to leak memos to the New York Times and the Washington Post – one of which provided the basis for a Page 1 article in the Times on February 4, 1951 – exposing the pressure and sharp tactics used by the White House and Treasury against the Fed. “TRUMAN IS DISPUTED BY THE RESERVE BOARD,” read the Times headline.
The article was accompanied by a detailed Fed memo approved by the Fed Board that described what actually happened at a meeting between the Fed and the Truman administration at the White House. The memo made it clear that Truman was trying to force the Fed to adopt a cheap money policy with which it did not agree. This contradicted the administration's public assurances that the Fed and the White House were on the same page.
Openly opposing the president and the Treasury Department was a dangerous move. The Fed's resistance was successful, not least because of the geopolitical pressure that North Korean and Chinese troops exerted on the Truman administration almost simultaneously.
The Korean War was underway and U.S. forces operating under United Nations auspices were losing ground. General Douglas MacArthur wanted to use nuclear weapons against China, which the Truman administration also considered.
In a November 1950 press conference and a subsequent White House statement, President Truman said he would not rule out the use of nuclear weapons.
Congress held hearings on the military crisis. Amid all this, the government gave in to the Fed's urging to release them to curb inflation, which the Fed said was fueled by military spending and the Treasury Department's insistence on low interest rates to finance the U.S. debt.
The background
The Fed had joined the Roosevelt administration's demands to engage in debt financing during World War II – what is now known as a period of financial repression. But in the early postwar period, the central bank became restless as deficit spending, low interest rates, and rising debt helped fuel inflation.
The outbreak of the Korean War—and the national security emergency that led to the protracted Cold War in which the Soviet Union replaced Nazi Germany as the United States' primary adversary—compounded the United States' economic problems. The Truman administration expected the Fed to promote U.S. national security interests, while the Fed insisted on protecting the value of the dollar, which it believed had been endangered by the administration's policies.
These conflicts over inflation, Fed independence, and U.S. foreign policy undermined President Truman's popularity. He did not run for re-election in 1952 and the Democratic candidate Adlai E. Stevenson lost in a landslide to General Dwight D. Eisenhower. Republicans gained control of the White House and both chambers of Congress for the first time since 1928. (Democrats regained control of Congress in the 1954 midterm elections.)
I've written before that presidents continued to pressure the Fed, sometimes with great success. For example, the Watergate tapes revealed the acquiescence of Fed Chairman Arthur F. Burns to President Richard M. Nixon's tribulations in 1971 and 1972. The Fed cut interest rates as ordered, and inflation skyrocketed, reaching 20 percent in 1980.
Paul A. Volcker, who became Fed chief in 1980, suppressed inflation by raising interest rates as high as 19 percent. He resisted pressure from the Reagan administration to lower interest rates in time for the 1984 election. Mr. Powell cited the Volcker example in 2022, when inflation spiked again, and vowed to do whatever it took to bring price increases under control. He still holds on to that vow.
The Fed's independence is now widely considered a tradition, but it is not unchangeable. In 2026, we may find out whether the Fed's ability to function as it sees fit, for better or for worse, will survive the Trump administration's disregard for these and many other U.S. traditions.