Fed's Fight for Independence: Can Trump's Pressure on MMFs Derail the Economy?

The Federal Reserve’s battle to maintain its autonomy has reached a boiling point in 2025, as President Donald Trump’s relentless criticism of Fed Chair Jerome Powell and his policies threatens to upend decades of institutional independence. While Trump’s public attacks focus on interest rates and inflation, the implications extend far beyond rhetoric—particularly for money market funds (MMFs), a $6.75 trillion cornerstone of the financial system. At the heart of this clash is Governor Christopher Kugler’s impassioned defense of central bank independence, which he argues is the bedrock of economic stability.

The Fed’s Case for Independence

Kugler, in a speech at the annual Economic Policy Symposium, drew on personal experience growing up in Colombia during periods of hyperinflation to underscore why central bank independence matters. “When political pressures override economic logic, the result is disaster,” he said, citing examples from Latin America where weak institutions led to soaring inflation. His argument hinges on the Fed’s dual mandate—to achieve price stability and maximum employment—while resisting short-term political whims.

The legal framework supporting this independence is clear: Federal Reserve governors cannot be removed except “for cause,” and the Fed’s policy tools, such as interest rates, are insulated from direct White House control. Powell has leaned on this legal shield, rejecting Trump’s demands to resign and emphasizing that policy disputes alone do not justify his removal.

MMFs at the Intersection of Policy and Politics

While Trump’s attacks have not directly targeted MMFs, the funds are deeply tied to the Fed’s actions. MMF balances hit a record $6.75 trillion by late 2024, driven largely by investor demand for safety amid economic uncertainty. But regulatory changes are reshaping this landscape:

• Government MMFs: These now dominate growth, with balances rising 15% in 2024, as investors flee riskier prime funds.
• Prime MMFs: Institutional prime MMFs have shrunk 18% to $218 billion, as SEC reforms limit their appeal to institutional investors.

The Fed’s stance on interest rates is critical here. Markets expect 2–3 rate cuts in 2025, potentially easing pressure on MMF yields. Yet Trump’s calls for faster cuts risk politicizing this process. “If the Fed caves to political pressure, the yield premium for riskier assets could vanish, destabilizing liquidity,” warns Kugler.

The Risks of Politicizing Monetary Policy

Trump’s broader economic agenda complicates matters. His tariffs on semiconductors and advanced technologies, such as a 10% tax on imports of Nvidia’s H20 chips, have already triggered market volatility. The S&P 500 dropped 1.3% in response, while Asian semiconductor stocks fell 4–6%. These actions, combined with his public feud with Powell, highlight a dangerous precedent: using trade and monetary policy as tools for short-term political gain.

The data is stark: Cross-country studies cited by Kugler show that central bank independence correlates with lower inflation. In Turkey and Argentina, where political interference has eroded independence, annual inflation exceeds 40%, compared to the U.S.’s 3.5% in 2024.

Conclusion: The High Stakes of Independence

The Fed’s defense of its independence is not merely ideological—it’s a shield against economic chaos. With $6.75 trillion in MMFs at risk if yields collapse or liquidity freezes, the consequences of political interference are enormous. The Fed’s legal safeguards and Powell’s resolve to withstand pressure are critical. However, the broader lesson is clear: When central banks lose their independence, everyone loses.

The markets agree. Investors, take note: The Fed’s next moves—and its ability to resist political overreach—will define the stability of this $6.75 trillion sector, and the economy itself.

In the end, the Fed’s fight isn’t just about interest rates—it’s about preserving the very foundation of trust in the financial system. And that’s a battle no president should be allowed to win.