Fed Independence Under Siege: How Trump’s Political Pressure Weakens the Dollar

The U.S. dollar has entered a precarious phase, with its value eroding amid escalating tensions between President Donald Trump and the Federal Reserve over the central bank’s independence. This political showdown—rooted in Trump’s demands for aggressive interest rate cuts and his threats to remove Fed Chair Jerome Powell—has raised alarms about the Fed’s ability to fulfill its mandate of price stability and maximum employment. The stakes are high: a destabilized Fed could upend global financial markets, while the dollar’s decline reflects investor skepticism about U.S. economic governance.

The Fed Under Fire: Political Pressure vs. Economic Prudence

President Trump has openly criticized the Fed for resisting his calls to slash interest rates, arguing that lower borrowing costs would boost consumer sentiment and stock markets. However, the Fed has maintained a cautious stance, pausing rate cuts despite inflation falling to 2.4% in 2024 from a peak of 9%. This reluctance stems from concerns over Trump’s tariff policies, including a 145% duty on Chinese imports, which risk reigniting inflation and stifling economic growth.

The conflict reached a boiling point when Trump publicly threatened to fire Powell, declaring, “If I want him out, he’ll be out real fast.” Legal scholars note the president lacks the authority to dismiss Fed governors without cause, thanks to the 1935 Humphrey’s Executor precedent. Yet Trump’s administration is pushing to overturn this legal shield in an upcoming Supreme Court case involving the National Labor Relations Board and Merit Systems Protection Board. A ruling in Trump’s favor could empower future presidents to exert direct control over the Fed, undermining its independence for the first time in its 112-year history.

Market Reactions: Dollar Weakness and Investor Anxiety

The dollar has already felt the ripple effects of this political battle. Since Trump’s re-election in 2024, the dollar index has dropped 5%, with bond yields rising and equity markets fluctuating. Treasury Secretary Scott Bessent warned that firing Powell could trigger a “market meltdown,” echoing concerns from economists like Peter Conti-Brown, who liken the risks to economic crises in Venezuela or Lebanon.

Investors are particularly wary of the Fed’s credibility. The central bank’s dual mandate—balancing employment and price stability—relies on its insulation from political whims. If the Fed becomes a tool of short-term political gains, long-term inflation expectations could rise, eroding the dollar’s value. The University of Michigan’s inflation expectations survey, for instance, jumped to 4.3% in February 2025, signaling growing unease among households.

The Legal Battle: Supreme Court’s Role in Defining Fed’s Future

The Supreme Court’s pending ruling on executive power over independent agencies could redefine the Fed’s autonomy. While the current case involves labor boards, the legal principles at stake could extend to the Fed. Justices like Clarence Thomas have criticized Humphrey’s Executor, arguing it violates separation-of-powers principles. However, Chief Justice John Roberts has emphasized distinctions between single-director agencies (like the Consumer Financial Protection Bureau) and multi-member boards (like the Fed), suggesting a potential carve-out for the central bank.

Even a partial erosion of Humphrey’s Executor could have dire consequences. Columbia Law professors Kathryn Judge and Lev Menand warn that weakening the Fed’s independence would “immediately destabilize markets” by casting doubt on its ability to resist political pressures. With the Fed’s term for Powell ending in May 2026, the Court’s decision in 2025 Q2 will be pivotal.

Tariffs and Trade: Fueling Inflation, Weakening the Dollar

Trump’s tariff-driven trade wars are compounding these risks. The 145% duty on Chinese imports, coupled with 25% levies on Canadian and Mexican goods, has already dampened consumer confidence, which fell to levels not seen since 2023. Sectors like autos and electric components face potential declines due to pre-tariff stockpiling followed by post-summer shortages.

The tariffs also risk reigniting inflation. The Fed’s dual mandate faces a stark challenge: raising rates to combat inflation could stifle growth, while cutting rates to boost employment might allow prices to spiral. This dilemma is reflected in the Fed’s projected path: only two additional rate cuts in 2025, with rates settling at 2.875% by late 2027.

Conclusion: A Dollar in Decline, a Fed in Peril

The U.S. dollar’s weakness is a symptom of deeper structural risks. With the Fed’s independence under legal and political assault, and inflation pressures resurging due to protectionist policies, the dollar’s status as a global reserve currency is increasingly uncertain.

Key data underscores the fragility:
- The dollar index has dropped 5% since mid-2024.
- Inflation expectations hit 4.3% in February 2025.
- The Fed’s projected terminal rate of 2.875% by 2027 reflects constrained policy options.

Investors should brace for volatility. A Supreme Court ruling in Trump’s favor would likely accelerate the dollar’s decline by eroding market confidence. Conversely, a reaffirmation of the Fed’s independence could stabilize the currency. For now, the dollar’s fate hangs in the balance—a casualty of political theater and economic uncertainty.