After years of public attacks on the Federal Reserve, former President Donald Trump appears to adopt a more measured tone in his new term. While he continues to advocate for lower interest rates, his criticism of the institution has lost its previous intensity. This shift contrasts sharply with his first-term rhetoric, where he openly threatened to replace Federal Reserve Chair Jerome Powell and labeled policymakers as “boneheads.” Recently, he even praised the Fed’s decision to keep rates steady in January, calling it “the right move.” Notably, an executive order aimed at curbing the autonomy of independent agencies explicitly excluded monetary policy, signaling a strategic retreat from direct confrontation. Analysts suggest this posture may reflect a calculated strategy to avoid market turmoil, as investors value the Fed’s independence to maintain economic stability.
Treasury Secretary Scott Bessent emerges as a key figure in the Trump administration’s revised economic approach. His focus lies on reducing long-term borrowing costs, such as mortgages and corporate credit, rather than the overnight rates controlled by the Fed. Bessent’s team argues that aggressive energy policies, tariffs, and tax cuts could stimulate growth without directly relying on the central bank. This strategy aligns with Trump’s broader agenda of deregulation and fiscal expansion, positioning long-term rates as a metric of economic success. However, critics highlight that the 10-year Treasury yield—Bessent’s preferred benchmark—is influenced by global factors beyond domestic policy, such as geopolitical tensions and foreign investor behavior. Experts question whether this vision will suffice to curb inflation, which remains above target levels, and warn that neglecting short-term rate tools could limit the administration’s flexibility during crises.
The emphasis on long-term rates underscores a gamble: betting on fiscal levers over monetary policy to reshape economic outcomes.
A Temporary Truce with the Fed: Behind the Scenes
Two factors explain Trump’s subdued criticism of the Fed: the influence of advisors like Kevin Hassett, who advocate for distancing the White House from monetary decisions, and the current economic landscape. Hassett, director of the National Economic Council, has reportedly emphasized that overt pressure on the Fed could destabilize markets, a lesson learned from Trump’s first term. With inflation stubbornly high and consumer spending declining—highlighted by February’s sharpest drop in retail sales in nearly four years—pushing for rate cuts now carries greater political risks. Additionally, Trump campaigned on a promise to tackle rising prices, making it harder to attack the Fed while inflation persists. This pragmatic stance, however, may be temporary. Economists warn: an economic slowdown could reignite tensions, especially if unemployment rises while inflation remains sticky, forcing the Fed into a policy bind.
‘The truce hinges on a fragile economic equilibrium, where both politics and pragmatism dictate restraint.‘
Contradictions in Bessent’s Plan
Despite the economic team’s optimism, skepticism surrounds the efficacy of their proposals. Trade tariffs and fiscal stimulus are viewed as inflationary, particularly in an already tight labor market where wage growth continues to outpace productivity gains. While Bessent points to 10-year Treasury yields as a benchmark for success, economists like Win Thin of Brown Brothers Harriman argue that current policies may backfire. Thin notes that tariffs disrupt supply chains, raising costs for businesses and consumers, while tax cuts could overheat demand without addressing structural inflation drivers. Historical parallels, such as the 1970s stagflation era, loom large in these debates. Furthermore, the administration’s push for accelerated energy production faces regulatory and environmental hurdles, complicating its growth narrative.
“Tax cuts amid full employment are like pouring gasoline on the inflation fire,” Thin emphasizes, highlighting the paradox of stimulating an already robust economy.
The Fed Under Quiet Pressure
Regulatory Battles and the Fight for Autonomy
Despite the apparent détente, signs suggest the Fed faces indirect pressure. The resignation of Michael Barr, Vice Chair for Supervision, and the withdrawal from global climate initiatives hint at regulatory shifts aligned with Republican priorities. Barr’s departure, amid GOP criticism of his focus on climate risk, underscores a broader effort to reframe the Fed’s regulatory agenda. Fed Chair Jerome Powell, however, remains cautious in his rhetoric, avoiding commentary on how Trump’s agenda might impact rate decisions. Behind the scenes, Powell has reaffirmed the Fed’s commitment to data-driven policy, even as political appointees scrutinize its regulatory actions. Meanwhile, the Fed’s retreat from international climate partnerships reflects a strategic pivot to avoid partisan clashes, preserving political capital for battles over monetary independence.
The Fed’s independence remains intact, but the specter of political interference looms, particularly in regulatory domains.
Markets as the Guardian of Monetary Independence
For investors, Fed stability is critical. Mark Spindel of Potomac River Capital notes that any perceived government meddling could trigger market volatility, as seen during Trump’s 2018 attacks on the Fed, which briefly rattled equity and bond markets. Trump, who often treats stock markets as a “scoreboard,” has reasons to avoid open clashes with the central bank, given their impact on consumer and investor sentiment. Spindel argues that financial markets act as a disciplinary force, punishing administrations that jeopardize institutional credibility. Recent Treasury yield fluctuations—driven by shifting expectations of Fed policy—demonstrate how quickly investor sentiment can turn. This dynamic incentivizes the White House to tread carefully, even as it pursues aggressive fiscal goals.
“Markets are the ultimate check against overreach,” Spindel states, underscoring the symbiotic yet tense relationship between Wall Street and Washington.
A Fragile Equilibrium
The relationship between Trump and the Fed appears precarious, sustained by a mix of political strategy and economic circumstances. As long as inflation remains elevated, the truce is likely to hold, with both sides avoiding actions that could destabilize the status quo. However, signs of recession or electoral pressures could reignite hostilities, particularly if Trump seeks to blame the Fed for economic pain ahead of the 2026 midterms. The lesson is clear: in the chess game of monetary policy, every move is calculated to avoid checkmating market confidence. Yet, the administration’s reliance on fiscal tools and deregulation carries its own risks, from inflationary spikes to unsustainable debt levels.
In the end, the real economy will bear the cost—whether through high rates, inflation, or risky interventions—as policymakers navigate the tightrope between growth and stability.