Donald Trump’s return to the White House could put pressure on the US Federal Reserve’s independence and potentially undermine its ability to fight inflation and unemployment free from political interference.

The Fed has a dual mandate from Congress to act independently to combat both inflation and unemployment—primarily by raising and lowering interest rates.

Anything that undermines the Fed’s independence could spook traders in financial markets, who might question whether the Fed can effectively combat inflation.

“With the exception of the first Trump administration, the prevailing view for the last 30 years has been that it is best to give the Fed the widest possible latitude to conduct monetary policy,” said David Wilcox, a senior fellow at the Peterson Institute for International Affairs. Economy (PIIE), he told AFP.

“Monetary policy is complex enough without requiring this additional consideration,” added Wilcox, a former senior adviser to three Fed presidents who is also Bloomberg’s director of U.S. economic research.

Trump’s ‘better instincts’?

The Federal Reserve System consists of a decentralized network of 12 regional reserve banks and a seven-member Board of Governors in Washington.

Fed governors are nominated by the U.S. president to staggered 14-year terms and must be confirmed by the Senate.

The Fed president and vice presidents are appointed from among these seven governors, and once appointed, they cannot be dismissed without cause.

The Fed Board of Governors also plays a role in approving nominees to run the 12 regional reserve banks.

But these nominations are made by the regional reserve banks’ own governors, providing a layer of protection against excessive intervention by the centre.

It is his choice of candidate that future President Trump can and likely will have significant influence on the Fed.

Jerome Powell is scheduled to leave the Fed chairmanship in May 2026, and Trump is not expected to renominate him.

The president-elect has harshly criticized Powell, his first nominee to head the U.S. central bank, accusing him of supporting Democrats without any evidence and even once questioning whether he was a greater enemy than Chinese President Xi Jinping.

The president-elect also said he had “better instincts” about the economy than many Fed governors and argued that the U.S. president should “at least” have a say in setting interest rates.

However, once Powell steps down as Fed Chairman, he will remain chairman until 2028 if he chooses to stay, complicating Trump’s nomination process.

To replace him with someone not currently on the board, Trump would need to either pressure a current governor to resign or replace Fed governor Adriana Kugler when her term ends in January 2026 and then nominate her replacement for the top job .

‘Excessive influence’

National chief economist Kathy Bostjancic told AFP that given the “outrageous influence” the US central bank governor has, the next Fed chief appointed by Trump “could change the dynamic and independence of monetary policy”.

“If someone is nominated and appointed and is seen to have political leanings and that allows them to influence monetary policy decisions, then that becomes quite complicated for the Federal Reserve,” he said.

But despite Trump’s Republican Party regaining control of the Senate, the next Fed Chair is still likely to face a lot of scrutiny, Steve Englander, head of North American macro strategy at Standard Chartered, told AFP.

“This isn’t like you pick a name out of a hat and throw it to the Senate, it’s confirmed the next day and it’s voted on the next day,” he said.

He added that senators “take their role very seriously.”

There’s also an eventual reversal point in bond markets, which takes into account the Fed’s expectations of where interest rates will be in the future, influencing borrowing rates on everything from mortgages to car loans.

“You can’t appoint someone who is 180 degrees from the mainstream … because the bond market will immediately reject that,” Englander said.

“The bond market is a guardrail,” he added. “There is a limit.”