The Trump administration threatens the Fed with a criminal cudgel

For nearly a year, Donald Trump has assailed the Federal Reserve with unjustified criticism and legal threats. Until this weekend, Jerome Powell, the Fed chair (pictured), maintained a studied public silence. Now, warfare between America’s central bank and the White House has broken out into the open.

In a video statement, Mr Powell accused the Department of Justice of issuing subpoenas to the Fed, relating to a long-running spat over the cost of renovating its headquarters. He was clear that he saw the move as a transparently political attack. “This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings,” he said. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”

Bizarrely, Mr Trump then denied knowledge of the probe, telling NBC News: “I don’t know anything about it, but he’s certainly not very good at the Fed, and he’s not very good at building buildings.”

The spat comes during a furious pressure campaign by Mr Trump on the Federal Reserve, which he says is moving far too slowly with rate cuts. In July he suggested that rates should be three percentage points lower than the 4.25-4.5% at which they then stood (they have since dropped by 0.75 percentage points). More recently, he has made the topsy-turvy argument that rising stockmarkets meant that interest rates should come down. Rock-bottom interest rates, he seems to hope, would lower mortgage rates, make government deficits cheaper and boost growth.

Mr Powell’s punchy response to the president’s apparent escalation will surely inflame the situation. Strikingly, financial markets have reacted uncomfortably to the news, but have so far not cratered. The benchmark S&P 500 index of large American companies fell by around 0.5% after futures trading opened on Sunday. Bonds have not budged much as yet, but precious metals have rallied sharply: gold by over 1% and silver by nearly 4%. The dollar is down a little. While the moves have the shape of a “debasement trade”, where worries about institutions push investors out of American assets, the scale has been modest. For now, the bond vigilantes are holding their fire.

The trouble for the president is that America’s robust economy makes deep rate cuts tough to justify. The one spot of weakness that might support easier monetary policy is the jobs market, which has wobbled a little. But the latest employment numbers were fairly solid, and unemployment is still low in historical terms. Inflation, spurred in part by tariffs, is stuck stubbornly above the Fed’s 2% target.

Meanwhile, overall GDP growth is booming, rising at a 4.3% annual rate in the third quarter of 2025. One popular real-time estimate by the Atlanta Federal Reserve suggests that headline fourth-quarter growth could be a staggering 5.1%, although that figure is distorted by big swings in net exports from Mr Trump’s tariffs. Still, even an estimate cutting out those shifts puts fourth-quarter growth well over 2%, a healthy pace.

Mr Powell has gradually pulled interest rates down over the past months, stewarding dissents in both directions from Fed governors and regional bank presidents—some demanding faster cuts and some questioning whether rates need to fall at all. A consistent outlier has been Stephen Miran, Mr Trump’s only second-term Fed appointee, who has repeatedly voted in favour of jumbo-sized 0.5-percentage-point cuts.

That balancing act was already set to get tougher in 2026. Most forecasters, including Fed rate-setters, expect a re-acceleration of growth in 2026 as the tax cuts passed over the summer start to land. A hotter economy would make lower interest rates even harder to justify. Meanwhile, the new slate of regional bank presidents who gain voting rights this year looks like a hawkish bunch, unlikely to favour many more cuts.

The next clash will be over who succeeds Mr Powell, whose term is up in May. Mr Trump is due to announce his choice over the next few weeks. Betting markets suggest a neck-and-neck race between Kevin Hassett, a close adviser to Mr Trump, and Kevin Warsh, a former Fed governor appointed by George W. Bush. Both men, and particularly Mr Hassett, are likely to hew much more closely to the president’s wishes than Mr Powell has. Last month, Mr Trump posted on Truth Social that “anybody that disagrees with me will never be the Fed Chairman”. Increasingly, it appears that only an extraordinarily pliant central banker will be able to keep the president happy. If so, American savers and investors are in for a nasty ride.■