The Fed has never been tested like this. It could emerge stronger than ever

The Federal Reserve has been tested before. Harry Truman in the 1950s pressured Fed policymakers to keep interest rates low so the U.S. could wage the Korean War. The showdown ended with then-Fed chair William McCabe forced to resign, but not without forging an agreement underpinning today's concept of central bank independence from the White House.

The accord faced its first major trial in 1964. Lyndon Johnson physically shoved then-Fed chief William Martin at his Texas ranch once the central bank raised interest rates to tighten credit and ward off rising inflation. “Martin, my boys are dying in Vietnam, and you won’t print the money I need,” Johnson said, pressing him to stick to an easy-money policy to finance the intensifying Vietnam War. Martin didn't budge.

But the central bank has never been tested to the limits as it has been under President Donald Trump. He has savaged Fed chair Jerome Powell constantly for almost a year and counting for not slashing interest rates quicker. He's carried out a scorched-earth campaign to get the Fed to fall in line. He's attempted to fire Fed Governor Lisa Cook over allegations of mortgage fraud, and the Department of Justice took the extraordinary step of opening a criminal probe into Powell earlier this month. Powell called it politically motivated for his refusal to cede on interest rates.

Yet the Fed's independence could come out stronger than ever, particularly if the Supreme Court sides with Cook as they appear likely to do after a recent two-hour oral argument session. Such a decision, setting a high bar for removing a Fed policymaker, effectively Trump-proofs the central bank in steering the U.S. economy through interest rate adjustments.

"I think that the oral arguments showed that the predisposition of the Supreme Court is to support the independence of the Fed," Gary Richardson, a former Fed historian who's now a professor at the University of California-Irvine, told Quartz. "It's possible... they might come down with a decision this term that substantially strengthens the independence of the Federal Reserve and protects the Fed against Donald Trump."

The Fed's Federal Open Market Committee is gathering for a regularly-scheduled, two-day meeting on interest rates next week, their first of the year. Fed policymakers are widely expected to pause rate cuts after lowering borrowing costs three times in a row in 2025.

Three top Fed officials backed up Powell in the two weeks since the probe was announced: New York Fed President John Williams, Minneapolis Fed President Neal Kashkari, and Philadelphia Fed President Anna Paulson. All maintained their support to keep interest rates steady, viewing the economy as being on sturdy footing though inflation has proven more stubborn than anticipated.

"I think there is going to be a rally around the leader phenomenon here," David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, told Quartz. "Whatever your views are about interest rates, most of the people at the Fed feel pretty strongly about maintaining the independence of the Fed and upholding the institution."

Many bankers, investors and policymakers will be closely watching Powell at Wednesday's post-FOMC news conference, the first since the DOJ probe was publicly announced. "Get the popcorn ready because we think this will be an FOMC meeting unlike any other during the Powell era at the Fed," Joseph Brusuelas, chief economist at accounting firm RSM, said in a blog post.

What's at stake

Powell stood firm this month in bluntly labeling the DOJ probe as political pressure, a rarity given the deference most policymakers and chief executives have shown Trump to avoid retribution. But it doesn't come as a surprise given his commitment to central bank independence like other Fed chiefs before him.

"We’re never going to be influenced by any political pressure," he said during a New York Economic Club speech in April 2025. "Our independence is a matter of law.”

Powell dialed up three GOP senators to drum up his base of support in Congress in the wake of the DOJ probe: Sen. Susan Collins of Maine; Sen. Lisa Murkowski of Alaska, and Sen. Kevin Cramer of North Dakota. Cramer was a notable choice given his identical, Trump-like criticism of the Fed for moving too slowly on interest rates.

Former Fed chairs and central bankers abroad spoke up in favor of Powell. Several Wall Street chief executives defended the Fed too — albeit gingerly.

"You don't want to chip away too much because... in my view, it will drive rates higher, not lower," JPMorgan $JPM Chase CEO Jamie Dimon said earlier this month. He was sued by Trump on Thursday for at least $5 billion over allegations JPMorgan Chase stripped him and several business entities associated with him of their bank accounts following the Jan. 6 insurrection at the U.S. Capitol.

The Fed, though, labored to accommodate Trump's conservative, deregulatory agenda, according to Wessel. In September, Powell announced the Fed was shrinking its total staffing by 10% over several years. A month later, Fed vice chair Michelle Bowman said the Fed's banking regulatory staff will be slashed 10% within a year.

"The Fed had downplayed its work on climate. The Fed cut its staff by 10% or said it was going to," he said. "The Fed backed off on its involvement in diversity, so they had done a lot to kind of outside of giving up their monetary policy independence to try and cooperate with the president."

In the past, the Fed has sometimes aligned itself with the White House while steeling its longstanding ability to set interest rates without political interference. But it appears nothing less than the Fed's full submission will appease Trump.

Even in the middle of an all-or-nothing gambit to obtain Greenland, the president couldn't resist browbeating Powell during his World Economic Forum speech originally billed as one focused on affordability. He brought up Powell twice by name and derided him as a "terrible chairman."

"We should be paying the lowest interest rate of any country in the world," Trump said.

Powell's term is up in four months, and Trump has choreographed a public race to succeed him. The four final candidates include Kevin Hassett, a White House economic aide; Kevin Warsh, a former Fed governor; Christopher Waller, a current Fed governor; and Rick Rieder, a BlackRock $BLK executive. Trump has hinted he's zeroed in on his pick already.

The chaos and disruption surrounding the Fed might not be entirely new. But it has been ratcheted up to new public extremes as 2026 gets in full swing.

"Certainly, since I've been following the Fed, we've never had anything even remotely like this. So it's all uncharted territory," Ryan Chahrour, a monetary policy professor at Cornell University, told Quartz. "No matter how expert and committed the people are on the FOMC, this is not good for monetary policy. It makes everything harder."