Few policy decisions matter more for investors than those taken by the US central bank, the Federal Reserve or Fed. US interest rates anchor global financial conditions, influencing asset prices, capital flows and risk appetite worldwide.
As a result, any challenge to the Fed’s independence is not just a domestic issue, but a development with potentially far-reaching implications for global markets.
2026 seems set to be a year that will reveal whether the Trump administration’s efforts to exert greater influence over the Federal Reserve are meaningfully checked. The recent announcement that the Department of Justice (DoJ) is investigating Fed Chair Jerome Powell comes ahead of a Supreme Court hearing regarding President Trump’s attempt to fire Lisa Cook from the Fed’s Board of Governors.
Moreover, in the coming weeks President Trump will announce who he is nominating to replace Chair Powell when his term ends in May.
The Powell probe
Concerns over the Federal Reserve’s independence have re-emerged following news that the US Department of Justice has launched an investigation into Chair Powell’s testimony to Congress last year regarding the cost of refurbishing the central bank’s buildings.
In a video statement responding to the serving of subpoenas, Chair Powell framed developments as an attack on the Fed’s independence, suggesting 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.” [1]
In a bid to stimulate the economy, President Trump has repeatedly called on the Fed to cut interest rates more aggressively than it has done so far. Trump, who has denied any knowledge of the investigation, has in the past said he would love to sack Chair Powell [2].
However, the Federal Reserve Act of 1913, states that Federal Reserve Board of Governors – of whom the Fed Chair is one - can only be removed by the President “for cause”, which is generally understood to mean misconduct, malfeasance or abuse.[3] If Chair Powell were ultimately found guilty of making false or misleading statements to Congress about the cost and scope of the aforementioned renovations, this would give the President ‘cause’ to sack him, and potentially replace him with someone more amenable to deeper rate cuts.
However, it is questionable whether this latest ruse will achieve the outcome President Trump desires, given how monetary policy decisions are made at the Fed. The Fed Chair undoubtedly has considerable influence, but policy decisions are made by the Federal Open Market Committee (FOMC) on which the Chair’s vote is only one of 12.
The 12 voting members of the FOMC consist of the 7 members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve, or Regional, Bank presidents, who serve one-year terms on a rotating basis. So, even if Chair Powell’s successor wanted to cut rates aggressively, there is no guarantee that he/she would be able to convince a majority in the FOMC to do so.
How influence could be exerted
This then begs the question as to whether the Trump administration could appoint sufficient voting members to the FOMC to do its bidding. Regardless of whether Powell ends up facing criminal charges, he will step down as the head of the Fed when his term as Chair ends.
However, the criminal probe into Powell has triggered a backlash among some Republican lawmakers, potentially complicating efforts to install a more pliant Fed Chair.
Several Republican senators have publicly distanced themselves from the DoJ investigation into Powell, arguing that the legal action undermines the Fed’s independence [4].
As Senate confirmation is required for any new Fed governor or Chair, Republican resistance in the Senate could make it harder for President Trump to win approval for his nominees. At the very least, the President’s nominee may come under closer scrutiny from the Senate.
Moreover, even if a Trump loyalist does become next Fed Chair, it is far from certain that they will fall into line once in office, especially given the need to establish credibility with his colleagues on the FOMC. It will be remembered that Powell himself was nominated for Fed Chair during Trump’s first presidency in 2017.
A further complicating factor is that, although Powell is due to stand down as Fed Chair in May, he could stay on as a member of the Board of Governors (and therefore a voter on the FOMC) until January 2028. Although it is traditional for outgoing Fed Chairs to also resign their separate seat on the Board, recent events could prompt Powell, in an act of defiance, to stay on in a bid to prevent a Trump takeover of the Fed.
Powell’s decision takes on added significance given the Trump administration’s efforts to remove Fed Governor Lisa Cook over allegations of mortgage fraud. The Fed’s seven-member Board of Governors serves staggered 14-year terms, a structure designed to ensure that no single president can appoint a majority.
However, if Cook (who denies the charges and has sued to remain in post) is found guilty and sacked, then President Trump will have the opportunity of nominating her successor to the board. The Supreme Court will hear arguments in the Cook case on 21st January, and a decision on whether Trump can fire her will probably be made later in the year.
The Supreme Court’s decision could have major repercussions for Fed independence if it ultimately means that the President has more leeway to sack a Fed Governor. Such a turn of events could potentially lead to a situation where Trump loyalists ultimately dominate the Fed’s Board of Governors.
However, even without formal dismissals or replacements, existing Board Governors could feel pressured to align their votes with the president’s preferences. Given that the Board holds 7 of the committee’s 12 votes, this could be sufficient to secure a majority on the FOMC.
A Board of Governors broadly aligned with President Trump would also have other channels through which to exert influence. It plays a central role in shaping the Fed’s agenda, policy language and forward guidance, and must approve, and can reject, nominees for regional Reserve Bank presidents put forward by regional boards.
In practice, however, scope for near-term influence via this route appears limited: in December, the Board unanimously renewed the five-year terms of 11 of the 12 regional Fed presidents [5]. One exception is the Atlanta Fed, where President Raphael Bostic is due to retire at the end of February 2026 and a search for his successor is under way.
Market impact muted
At present, investors are not showing signs of alarm over the potential repercussions from an erosion of Fed credibility. In theory, an overly accommodative, politicised Fed would risk higher inflation by overheating the economy and weakening the US dollar. Moreover, politicisation of the Fed would risk undermining the central bank’s credibility, which itself could make inflation harder to contain, as price shocks are more likely to persist and inflation expectations are likely to become less well anchored.
This could potentially have serious implications for financial markets if higher inflation expectations resulted in a sharp rise in bond yields. There has been some tentative evidence to suggest that markets might be starting to worry on this front.
The 10-year breakeven inflation rate (the gap between a conventional 10-year US Treasury bond and its inflation-protected equivalent; a measure of the expected average inflation rate over the next decade) has risen a little since news broke of the investigation into Chair Powell. However, at 2.33% it remains well within the 2.0-2.4% range that has prevailed over the last four years.
Similarly, the 10-year US Treasury yield has risen to a 4-month high of 4.23% [6], but it remains within its 2-year trading range and is partly the result of recent stronger-than-expected economic data. Gold, a traditional hedge against inflation and currency debasement, has risen to fresh record highs in recent days but is also benefiting from renewed geopolitical tensions; not least regarding tensions over Greenland.
Crucially, markets have not priced in the more aggressive easing that might be expected from a politically-pressured Fed. On the contrary, rate expectations (focused on two 25-basis-point cuts by end-2026) have been scaled back slightly [7].
This move is being attributed to recent comments by President Trump suggesting that Kevin Hassett - currently a senior economic adviser to the White House and seen as a Trump loyalist - will not be nominated to replace Fed Chair Powell. As it stands, betting markets currently see Kevin Warsh (a former Fed Governor, who while favouring lower rates is seen as having more credibility with markets and is somewhat more hawkish than Hassett) as the favourite to succeed Chair Powell [8].
Safeguards appear to hold, for now
Any weakening of Fed independence could have important implications for economic and financial stability. Although pathways exist for greater White House influence over Fed policy, substantial institutional barriers remain.
Significantly, a growing coalition of Republican senators are seemingly prepared to stand up to an increasingly unpopular President and have voiced opposition to any measures that would undermine Federal Reserve independence. This resistance reflects, in part, concerns that pressing for lower policy rates could backfire by lifting inflation expectations and longer-term bond yields on which most US mortgage rates depend.
Ironically, by highlighting the issue of Fed independence, recent events may lead to more intense scrutiny of the next Fed Chair’s credentials, limiting the risk of an overtly compliant appointment. Within the FOMC, the balance of opinion on rate cuts could even tilt slightly more hawkish if Powell were to stay on as a Fed governor and policymakers sought to assert their independence.
However, given President Trump’s willingness to pressure Fed officials - a tendency that could be reinforced if he were to succeed in removing Fed Governor Lisa Cook - investors should remain alert to the risks.
23 January 2026
[1] https://www.federalreserve.gov/newsevents/speech/powell20260111a.htm
[2] https://www.theguardian.com/business/2025/dec/29/trump-jerome-powell-latest-attack-fed-chair
[4] https://time.com/7345792/republicans-break-ranks-with-trump-administration-over-powell-investigation
[5] https://www.reuters.com/business/fed-regional-bank-presidents-reappointed-unanimous-vote-2025-12-11/
[6] https://tradingeconomics.com/united-states/government-bond-yield
[8] https://polymarket.com/event/who-will-trump-nominate-as-fed-chair