The Federal Reserve prevents unchecked inflation by inhibiting excessive spending. On the other hand, presidential administrations frequently focus on short-term benefits for their constituents—often the sole benchmark for their popularity. For over a century, these competing goals inevitably led to conflicts between the executive branch and the Fed.

A few weeks into his presidency, President Donald Trump appears set to follow this tradition. During his first term, the Fed drew President Trump’s ire by raising interest rates and restricting economic activity—commonly considered politically damaging moves for the existing presidential administration. His second term looks ready for more of the same, with the Fed recently deciding to hold rates steady, drawing a sharp rebuke from the returning administration.[1]

While President Trump’s open verbal challenges to the Fed may raise eyebrows, they seem primarily aimed at preserving his popularity, rather than any practical effort to change Fed policy. If so, Trump may be better positioned than most presidents to weather the storm—he will appear like he is advocating for his constituency, while the Fed bears the brunt of taking the unpopular steps necessary to preserve our economy for years to come. Everything is as it should be.

I. Background

A. Before the Fed

Following the Revolutionary War, a newly formed United States confronted severely devaluated state and Continental currency.[2] A certain founding father solved this problem by successfully lobbying for the First Bank of the United States.[3] The First Bank operated for about 20 years before public support waned and the government allowed its charter to expire. The next year, the War of 1812 broke out, leading to the Second Bank of the United States in 1816.[4] This cycle of crisis, stability, drawdown, and crisis continued on for a century: the Second Bank of the United States’ charter expired in 1836;[5] followed by the American Civil War; the National Banking Acts of the 1860s;[6] then another drawback during reconstruction.

The inevitable next crisis came in October 1907.[7] Investors in New York attempted a short squeeze, aggressively buying up copper company shares to squeeze suspected short sellers. However, they misjudged the market, leaving ample shares available for short sellers to cover their positions. The shares’ value eventually collapsed, wiping out the investors’ positions and leading to lost confidence in banks associated with them. The resulting runs on these institutions and their counterparties caused a market contraction surpassed only by the Great Depression.[8]

To resolve the 1907 crisis, and taking inspiration from prior financial crises, banking interests advocated for a centralized federal reserve system overseen largely by bankers.[9] Meanwhile, small town business owners and farmers remained skeptical of independent banking institutions.[10] In a fateful twist, reformer Woodrow Wilson secured the presidency, supporting the latter group with a plan to create a centralized monetary system outside private bankers’ sole control.[11]

B. The Federal Reserve System

Congress adopted Wilson’s plan with the Federal Reserve Act of 1913.[12] The Act, among other things: created regional reserve banks to act as lenders of last resort, ensuring credit even during times of financial instability;[13] required national banks to join their respective reserve banks by purchasing their stock and set aside specified capital in case of panic;[14] created a single, unified currency, Federal Reserve Notes, which regional reserve banks could distribute through members;[15] and created a national board of governors to set a single national monetary policy—all non-bankers appointed to lengthy terms with no stated right of removal by the president.[16]

Of course, the Act did not spell the end for financial crises, nor did it even reduce their severity. To the contrary, the Great Depression fifteen years later, and subsequent World War, demonstrated the Fed’s limitations. During this period, the Fed deferred heavily to the Treasury on policy, reducing interest rates to help finance government projects in the 1930s and military spending in the 1940s.[17] This led to rapid inflation following the Second World War: 14% in 1947 and 8% in 1948, according to the Consumer Price Index.[18]

Learning from these mistakes, the Fed took unilateral action to combat inflation in the early 1950s. It publicly announced it would no longer follow the Treasury in setting low interest rates, despite sluggish economic activity and a new war in Korea.[19] Instead, it would focus on halting inflation, even at the cost of short-term economic improvement. The Treasury’s response, and the subsequent dust-up between these major government regulators, resulted in the “Treasury-Fed Accord”: a 1951 agreement between the agencies allowing the Fed to focus on what it considered its core purpose: “control of money creation to stabilize the purchasing power of the dollar.”[20]

The Fed preserved this accord over the next several presidential administrations. Despite frequent informal pressures from various presidents,[21] including public, aggressive attacks from Presidents Johnson and Nixon,[22] the Fed continued to set interest rates and general policy based solely on inflation and market conditions. By Trump’s election in 2024, the Fed cemented its non-partisan, independent reputation, with nearly seventy-five uninterrupted years of monetary policymaking focused solely on combating inflation without presidential interference.

II. International Comparisons

Many nations now use similar models with their own central banks, with studies indicating most central banks grew significantly more independent from political pressures over the past seventy-five years.[23] These increases in independence almost always followed high inflation, suggesting most governments adopted the majority viewpoint that an independent central bank remains the best counterbalance to inflation—even at the cost of low rates and easy money.[24]

That’s not to say some countries have not tried alternatives. In one example, Venezuela went from the highest economic growth rate and lowest inequality economy in Latin America to scarcities of nearly every major good and massive inflation in only a few years—due in no small part to political factors impacting its central bank.[25]

Venezuela’s oil-based economy suffered after prices fell in the early 1980s, leading to large withdrawals of capital and high debt. As foreign currency reserves ran dry, the government implemented currency controls to limit outflow of valuable foreign currencies, against the wishes of the Central Bank of Venezuela.[26] The day the government implemented these controls became known as Viernes Negro (Black Friday): purchasing power using the Venezuelan bolivar collapsed within hours, with the economy never able to recover.[27]

In a more recent example, Turkey’s President Recep Tayyip Erdoğan insisted on continued interest rate cuts in the early 2020s to spur spending, even as inflation increased.[28] When the central bank opposed these cuts, President Erdoğan fired its governor, replaced a finance member who supported the fired governor, and then even removed the head of Turkey’s statistical institute for reporting the resulting high inflation.[29] However, the inflation continued to increase beyond sustainable levels, eventually forcing Erdoğan to reverse course in 2023.[30] By January 2025, Turkey’s Central Bank set interest rates as high as 45%—an incredible restriction on lending Turkey’s leaders apparently now see as essential to combat rampant inflation.

III. Analysis

As president, Donald Trump now demands the Fed cut its interest rates to stimulate spending and ease burdensome interest rates.[31] These moves would undoubtedly benefit the average American in some ways: allowing consumers to refinance high-mortgage rates and mitigating the impact of borrowing rates on other products like credit cards.[32] These demands also represent rational self-interest: evidence suggests restrictive monetary policy can lower a president’s approval rating by as much as five percentage points over the following few years.[33] Finally, these demands are not unusual: nearly every past president tried to exercise some control over Fed policy, with Presidents Lyndon Johnson and Richard Nixon making similarly aggressive demands on the Fed during their tenures.[34]

As Venezuela, Turkey, and other examples show,[35] popular, consumer-friendly decisions in the short term can carry devastating consequences in the long term. The international community learned from these mistakes, enabling central banks to make the politically tough decisions when long-term risks outweigh short-term benefits.[36] The Fed is no different, focused on preventing these catastrophes at any cost.

President Trump may be in the best situation possible to deal with restrictive Fed policy. Most presidents, with Nixon and Johnson as exceptions, remained relatively quiet on Fed policy, even as they tried to shape it behind the scenes.[37] This approach does nothing to disassociate the administration from the Fed, allowing the electorate to tie the consequences of complicated, restrictive monetary policy to the existing presidential administration by sheer proximity.[38]

President Trump, on the other hand, expressed open disdain for the Fed beginning in his first term.[39] His voters likely experience no confusion about whether he willingly chose Fed policies preserving high interest rates at the cost of stipulating spending. By continuing to openly attack the Fed, Trump avoids association with the short-term pains higher interest rates cause. By then agreeing he cannot disturb Fed policy, he also prevents the catastrophic hyperinflation which could otherwise result. In other words, he may have the best of both worlds: plausible deniability for short-term consequences while preserving his long-term economic legacy.

A president, responsive to political factors and the whims of the electorate, wants ready access to credit at low costs.[40] The Fed, on the other hand, has the power and historical authority to sacrifice these short-term benefits to prevent broader financial collapse.[41] These contradicting pressures will inevitably lead to conflict, but, in the end, that’s not a bug—it’s a feature. President Trump can continue his verbal assault on the Fed’s choices to protect his immediate popularity, while resting assured the Fed will willingly take the blame to avoid hyperinflation for decades to come.

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[1] McCorvey, J.J., et al., Trump Slams Fed After Decision to Hold Interest Rates Steady, NBC News (Jan. 29, 2025), https://www.nbcnews.com/business/economy/federal-reserve-interest-rate-decision-january-2025-what-to-know-rcna189628 (last accessed Feb. 1, 2025, at 12:05 a.m. CT).

[2] Newman, Eric P., The Early Paper Money of America (3rd Ed.), 17 (1990).

[3] Miranda, Lin-Manuel, Cabinet Battle #1, Hamilton: An American Musical (2015) ("The issue on the table: Secretary Hamilton's plan to assume state debt and establish a national bank."). Although the First Bank of the United States did help stabilize federal currency and provide the government credit, it did not actually set monetary policy as it was not a government institution.

[4] Johnson, Roger T., Historical Beginnings . . . The Federal Reserve, 9 (2010).

[5] Johnson, at 9-11.

[6] Johnson, at 12-13.

[7] Moen, Jon R., et al., The Panic of 1907, federalreservehistory.org (Dec. 4, 2015), https://www.federalreservehistory.org/essays/panic-of-1907 (last accessed Jan. 31, 2025, at 3:00 p.m. CT).

[8] Id.

[9] Johnson, at 18.

[10] Id. at 19-20.

[11] Id.

[12] 28 U.S.C. § 226.

[13] 28 U.S.C. § 222.

[14] Id.

[15] 12 U.S.C. § 411.

[16] See 12 U.S.C. § 244 ("No member of the Board of Governors of the Federal Reserve System shall be an officer or director of any bank, banking institution, trust company, or Federal Reserve bank or hold stock in any bank, banking institution, or trust company; and before entering upon his duties as a member of the Board of Governors of the Federal Reserve System he shall certify under oath that he has complied with this requirement, and such certification shall be filed with the secretary of the Board.").

[17] Slivinski, Stephen, The Evolution of Fed Independence: How Monetary Policy and Central Bank Autonomy Came of Age, 6 (2009).

[18] Walsh, Carl. E., Federal Reserve Independence and the Accord of 1951, FRBSF Weekly No. 93-21, 2 (May 28, 1993).

[19] Slivinski, at 6.

[20] Id. at 6-7 (quoting Hetzel, Robert L., et al., The Treasury-Fed Accord: A New Narrative Account, Federal Reserve Bank of Richmond Economic Quarterly, Vol 81, 33-55 (2001)).

[21] Adra, Samer, Monetary Policy and Anxious Presidents: the Effect of Monetary Shocks on Presidential Job Approval, Politics & Policy Journal, Volume 50, Issue 2, 244-273 (Feb. 20, 2022) ("former Fed Chairman Alan Greenspan, who served under four consecutive presidents (Reagan, Bush Sr., Clinton, and Bush Jr.), affirms that presidents try to sway Fed decisions 'all the time'").

[22] Slivinski at 7.

[23] Dincer, Nergiz, et al., Central Bank Independence: Views from History and Machine Learning, Annual Review of Economics, Volume 16:393-428 (Aug. 2024).

[24] Id.; see also Walsh, at 3 ("It is important that monetary policy be unconstrained by debt management considerations. Requiring the Fed to maintain interest rates at levels that are too low runs the risk of increased inflation.").

[25] Polga-Heclmovich, John, The Roots of Venezuela's Failing State, OSU Origins (April 2017), https://origins.osu.edu/article/roots-venezuelas-failing-state (last accessed Jan. 31, 2025, at 9:45 p.m. CT); Alonso, Juan Francisco, What was Black Friday and Why did it Mark the End of 'Saudi Venezuela', BBC News World (Feb. 17, 2023), https://www.bbc.com/mundo/noticias-america-latina-64428203 (last accessed Feb. 3, 2025, at 6:15 a.m. CT).

[26] Alonso, https://www.bbc.com/mundo/noticias-america-latina-64428203; Boon, Lisseth, et al., Un Dia Como Hoy El Bolivar Perdio Su Fortaleza, El Munto (Feb. 18, 2013), https://web.archive.org/web/20140903062958/http://www.elmundo.com.ve/noticias/economia/politicas-publicas/un-dia-como-hoy-el-bolivar-perdio-su-fortaleza.aspx (last accessed Jan. 31, 2025, at 10:15 p.m. CT).

[27] Polga-Heclmovich, https://origins.osu.edu/article/roots-venezuelas-failing-state.

[28] Malsin, Jared, Turkey's Erdogan Fires Statistics Chief After Record Inflation, Wall Street Journal (Jan. 29, 2022), https://www.wsj.com/articles/turkeys-erdogan-fires-statistics-chief-after-record-inflation-11643456492 (last accessed Jan. 31, 2025, at 10:20 p.m. CT).

[29] Id.

[30] Turkey's Central Bank Lowers Benchmark Interest Rate to 45%, Associated Press (Jan. 23, 2025), https://apnews.com/article/turkish-central-bank-lowers-interest-rate-inflation-2765c5c10f1acf99c8a48f9082873b88 (last accessed Jan. 31, 2025, at 10:25 p.m. CT).

[31] Derby, Michael S., et al., Trump Demands Fed Cut Rates, Claims Better Monetary Policy Understanding, Reuters (Jan. 23, 2025), https://www.reuters.com/markets/us/trump-says-he-will-demand-lower-interest-rates-immediately-2025-01-23/ (last accessed Jan. 31, 2025, at 10:35 p.m. CT).

[32] Hansen, Sarah, No Relief in Sight: Why Mortgage Rates and Borrowing Costs are Stuck Despite Fed Cuts, Morningstar (Jan. 31, 2025), https://www.morningstar.com/economy/fed-is-cutting-interest-rates-why-is-consumer-borrowing-still-so-expensive (last accessed Jan. 31, 2025, at 10:40 p.m.).

[33] Samer, at 244.

[34] Slivinski, at 7.

[35] The Weimar Republic after World War I, Hungary after World War II, and Brazil after its military dictatorship also suffered rampant inflation due in part to unrestricted spending.

[36] Dincer at 1; Walsh at 3.

[37] Adra, at 244

[38] Id.

[39] Id.; Derby at 1.

[40] Hansen, https://www.morningstar.com/economy/fed-is-cutting-interest-rates-why-is-consumer-borrowing-still-so-expensive

[41] Slivinski at 7.