Written by: Jin Ten Data

Nick Timiraos, a Wall Street Journal reporter known as the "Federal Reserve's mouthpiece," recently wrote that for decades, the Federal Reserve's independence from the White House has been built on a set of unwritten norms: the president can nominate members of the central bank's board, including the chairman, and occasionally complain about interest rate policies, but ultimately will let the Federal Reserve operate on its own.

A federal judge issued a ruling last Friday, rejecting two criminal subpoenas against Federal Reserve Chairman Powell. This event highlights how President Trump broke that tacit understanding, attempting through all possible means to directly control interest rate decisions. As a result, what protects the Federal Reserve's independence today is no longer a political consensus but a court ruling.

In a newly released 27-page ruling, U.S. District Judge Bosberg halted an investigation initiated by Trump's long-time ally, federal prosecutor Piro. He concluded that the subpoenas issued regarding last summer's congressional testimony on the refurbishment of the Federal Reserve building were intended to "harass and pressure" Powell to reduce interest rates or resign. Piro indicated she intends to appeal.

Judge Bosberg, appointed by Obama, stated that the government did not provide any evidence of criminal wrongdoing, and several Republican senators on the committee that heard the testimony expressed similar views.

Timiraos pointed out that the subpoena controversy is not the only battlefield delineating the Federal Reserve's independence by judges rather than political restraint. Currently, the Supreme Court is weighing whether Trump can remove Fed Governor Cook on suspicion of mortgage fraud, which Cook himself vehemently denies.

This case could define the ease or difficulty with which a president can fire members of the central bank's board for the first time. If the ruling favors protections against Cook's dismissal, it would further solidify the legal moat around the Federal Reserve. However, if the ruling is unfavorable to her, it could give any future president leverage to directly intervene in monetary policy, which would be unprecedented.

The Supreme Court is expected to issue a ruling in Cook's case that is unfavorable to Trump. "He is trying to deal with two governors in two blatantly public ways. He has already been rebuffed by one court and will undoubtedly be rebuffed by a higher court," said investment manager Mark Spindel, who is also a co-author of a historical work on the independence of the Federal Reserve.

The independence of the Federal Reserve exists because Congress and previous presidents clearly understand the trade-offs: forcing interest rate cuts to stimulate short-term economic growth often comes at the cost of higher inflation in the future.

U.S. law grants the Federal Reserve the power to control its budget, provides its officials with long and staggered terms, and shields them from the threat of dismissal for policy disagreements. Countries like Turkey or Argentina, where monetary policy is controlled by political leaders, often suffer from prolonged inflation, which not only erodes the people's living standards but also undermines macroeconomic stability.

Timiraos added, however, that legal victories alone may not be enough to ensure the Federal Reserve's autonomy. The central bank ultimately relies on sustained and wide-ranging political support to defend its independent status. Trump's relentless approach may ultimately awaken a Senate that was previously indifferent to resisting executive power.

In particular, retiring Republican Senator Tillis has vowed to block personnel nominations at the Federal Reserve, hindering the transition process for Powell's successor, whose term will expire in two months. Previously, Trump had nominated former Federal Reserve Governor Waller to be the next chairman.

The transition of power, along with Trump's public declaration that he expects the next Federal Reserve chairman to cut interest rates, makes the courtroom battles surrounding the subpoenas and Cook's dismissal even more critical, as these cases will determine the boundaries of presidential power over the central bank.

Timiraos stated that for Waller, this controversy carries an inherent paradox. The judicial system and Congress's strong defense of the Federal Reserve's independence may serve as a valuable "shield" after he takes office, assuring investors that the Federal Reserve is capable of taking unpolitically popular measures to control inflation when necessary.

However, he will be walking on thin ice on his way to taking office. Tillis hinted last Friday that Piro's decision to appeal may delay the confirmation of Waller's nomination.

Waller could face severe challenges early in his tenure: he must demonstrate enough independence to allay concerns from lawmakers and investors about his ability to formulate policies impartially, while not angering the president, who just last week requested an immediate rate cut from the Federal Reserve—of course, the Federal Reserve officials are unlikely to comply with this request at this week's meeting.

The danger facing the Federal Reserve is that the very steps it has taken to defend itself may make it more difficult to remain outside the political maelstrom. The uncovered documents show that the central bank is launching the strongest counteroffensive against a sitting president in history. In the filing, the Federal Reserve's external lawyers listed 100 public statements attacking Powell made by Trump and his allies from 2018 to the present.

The Federal Reserve argues that these records lead to only one conclusion, that these subpoenas were meant to help Trump "seize powers that federal law clearly prohibits him from having." Piro stated at a news conference last Friday that the judge's ruling erroneously granted Powell "absolute immunity" in the face of the investigation.

Timiraos concluded that currently, judges and lawmakers have drawn a safety baseline for the Federal Reserve. Once Powell steps down and the new chairman takes office, whether this baseline can be maintained will truly test the independence defended by court rulings, to see if it can be as invulnerable as the independence once maintained by traditional consensus.