Trump challenges the Fed’s independence — here’s how the central bank works

Trump pressures the Fed, but here’s why control isn’t so simple

Understanding the Federal Reserve’s structure and who really sets monetary policy

President Donald Trump has renewed his attacks on the U.S. Federal Reserve and its Chair Jerome Powell, expressing frustration over recent comments suggesting that tariffs could complicate the central bank’s ability to manage the economy. Trump has even floated the idea of removing Powell—raising fresh questions about how much influence the White House can actually wield over the Fed.

In reality, the Federal Reserve is designed to be independent from short-term political pressures. And while the president appoints top officials, he doesn’t directly control monetary policy.

How the Federal Reserve System is structured

The Federal Reserve operates under a hybrid structure that combines centralized governance with regional input. At the core of the system is the Board of Governors, based in Washington, D.C. This body includes six members plus a chair, each nominated by the president and confirmed by the Senate. These appointments are made on staggered terms to ensure continuity across administrations.

However, monetary policy isn’t set by the Board alone. The broader system includes 12 regional Federal Reserve Banks, each operating semi-independently and privately owned by commercial banks in their respective regions. These banks play a critical role in shaping interest rate decisions and economic forecasts.

The FOMC: Where monetary policy happens

The Federal Open Market Committee (FOMC) is the Fed’s main policy-making body. It comprises:

• The seven members of the Board of Governors (including the Chair),

• The president of the New York Fed, and

• Four rotating presidents from the other 11 regional banks.

While only these 12 individuals vote on interest rate policy, all regional Fed presidents participate in FOMC meetings, providing input and forecasts that help shape decisions.

This design ensures that monetary policy reflects a broad range of economic conditions and not just the perspective of Washington D.C. or the political administration in power.

What the Fed actually does

The Federal Reserve’s primary tool for managing economic activity is the federal funds rate—the target interest rate at which commercial banks lend reserves to each other overnight. By raising or lowering this rate, the Fed influences borrowing costs, consumer spending, investment, and inflation.

Changes to the federal funds rate are typically announced following the conclusion of FOMC meetings, which are scheduled several times per year. These decisions are based on a combination of economic data, financial conditions, and longer-term forecasts.

The Fed also provides critical services to the banking system. Often described as a “bank to banks,” it helps maintain liquidity and ensures stability in times of financial stress. It pays interest on reserves held by commercial banks and influences broader financial conditions through open-market operations.
 

Can Trump remove Powell?

Although Trump has publicly suggested replacing Jerome Powell as Fed Chair, doing so would be legally and politically complicated. While the president can appoint and reassign officials within the executive branch, the Federal Reserve operates under laws that are specifically designed to insulate it from direct political interference.

Powell was confirmed by the Senate to a four-year term as Chair and a 14-year term as a governor. Removing him without cause would likely trigger legal challenges and market turmoil, while raising serious concerns about the Fed’s independence.

Why the Fed’s independence matters

The central bank’s credibility hinges on its ability to act independently of political influence. Markets and investors closely monitor the Fed’s actions not just for rate guidance, but also as a signal of long-term stability and policy continuity.

Repeated efforts to pressure or control the Fed—whether through public criticism or personnel changes—can undermine that credibility, potentially increasing borrowing costs or causing volatility in financial markets.

As Trump continues to pursue aggressive trade and economic strategies, tensions with the Fed may escalate further. But for now, the central bank’s institutional design stands as a bulwark against political interference.

Stay tuned to finance news with The Horizons Times for continuing coverage of monetary policy, central bank independence, and the politics shaping U.S. economic leadership.