The Fed’s Real Vulnerability Is Capture, Not Criticism

Markets do not need a coup to get nervous. They need odds.

That is the useful way to read Jerome Powell’s latest warning about the Federal Reserve. Powell, whose term as Fed chair ended on May 15, 2026, said in prepared remarks for a John F. Kennedy Library award that the central bank was going through a “stress test” and that its credibility was on the line; he also warned that if an administration found a way to remove Fed officials over policy differences, future administrations would do the same and the public would lose faith that the central bank was acting for all Americans, according to Axios¹. I think Powell is right to sound the alarm. But the alarm should be aimed at the real weak point: not presidential insults by themselves, but the moment those insults become a plausible path to personnel control.

The Federal Reserve is the U.S. central bank, the institution that uses monetary policy, mainly interest rates and its balance sheet, to steer inflation and employment. In its own June 18, 2025 policy statement, the Fed said it seeks maximum employment and inflation of 2 percent over the longer run, and that it would assess labor-market data, inflation pressures, inflation expectations and financial developments when setting policy Federal Reserve². Central-bank independence does not mean the Fed gets to rule the economy without democratic limits. It means elected officials set the goals, while the central bank gets operational room to choose the tools without being bullied into easier money before an election. Inflation expectations are the public’s and markets’ beliefs about future price growth. Treasury yields are the interest rates investors demand to lend to the U.S. government. If investors come to believe the White House can make the Fed cut rates when inflation is still hot, they will demand compensation for that risk.

The first thing to get straight is that credibility has not collapsed. The best evidence against panic is market evidence. A December 2025 Peterson Institute briefing looked at market pricing from November 1, 2024 through late October 2025, a period that included the April 2025 escalation in Trump’s criticism after his “Liberation Day” tariff announcement; it found that longer-horizon inflation expectations derived from Treasury Inflation-Protected Securities, including five-year, 10-year and five-year five-year-forward measures, were “flat to down,” and that the yield curve did not suggest a decline in inflation-fighting credibility Peterson Institute for International Economics³. That matters. If the Fed had already lost the bond market, this is where I would expect to see it: in long-run inflation compensation, the term premium on long bonds and the dollar.

The Fed’s own actions in 2025 also looked much more like resistance than submission. On June 18, 2025, the Federal Open Market Committee, the Fed’s rate-setting body, kept the federal funds target range at 4.25 percent to 4.5 percent and said inflation remained somewhat elevated Federal Reserve². On September 17, 2025, the committee cut rates by a quarter point to 4 percent to 4.25 percent, but it tied the move to slower job gains and rising downside risks to employment while reaffirming the 2 percent inflation objective; Stephen Miran dissented because he wanted a larger half-point cut, and the rest of the voting committee did not follow him Federal Reserve⁴. That is not what capture looks like. Capture would look like a broad committee shift toward easier policy for political convenience, especially with inflation still above target.

So I do not buy the most dramatic version of the Fed-independence scare: that every presidential broadside automatically shreds credibility. Presidents have jawboned the Fed before. Markets know this. They also know that the Fed is not just one person in an office. The Board of Governors, the regional reserve bank presidents, the Federal Open Market Committee, Senate confirmation and the courts all sit between a president’s demand and an interest-rate decision.

But the calmer reading can go too far. A market can believe the Fed is intact today and still begin pricing the chance that it may not be intact tomorrow. That is exactly what happened in April 2025. Reuters reported that Wall Street stocks skidded on April 21 after Trump renewed attacks on Powell and after White House economic adviser Kevin Hassett said the administration was studying whether firing Powell was an option; the S&P 500 closed down 2.36 percent, the Nasdaq fell 2.55 percent, the Dow fell 2.48 percent, the dollar index slipped 0.41 percent and selling in the 10-year Treasury pushed its yield up 8.2 basis points to 4.4087 percent Reuters via Investing.com⁵. The next day, after Trump said, “I have no intention of firing him,” Reuters reported that equity index futures jumped nearly 2 percent and that stocks, bonds and the dollar had all slumped the prior day during the attacks Reuters via Investing.com⁶.

That episode does not prove investors suddenly expected 1970s inflation. It does prove something narrower and more important: Fed independence had become a tradable risk factor. Tariffs, fiscal stress and recession fears were all tangled into the price action, so a clean one-day causal story would be fake precision. Still, when the same political risk escalates and then de-escalates, and markets move in the direction one would expect, I do not dismiss it as noise. I read it as a warning label.

The law is a shield, not a force field. Federal Reserve governors serve staggered terms of up to 14 years and may be removed sooner only “for cause,” according to 12 U.S.C. § 242⁷. That design is supposed to prevent a president from clearing the board simply because rates are inconvenient. The Supreme Court also tried to calm this exact fear in its May 22, 2025 order in Trump v. Wilcox, saying the Federal Reserve is a “uniquely structured, quasi-private entity” in a distinct historical tradition and that the case did not necessarily implicate Fed removal protections Supreme Court⁸.

Yet the same order also shows why investors cannot just go back to sleep. The Court allowed the president’s removal of officials at other independent agencies to remain in effect while litigation continued, even though no qualifying cause had been given for those removals, according to the order Supreme Court⁸. The Fed carve-out was reassuring. It was also bespoke. If the central bank’s independence depends partly on emergency-docket language and future litigation, markets will assign a probability to adverse legal outcomes. Small probabilities matter when the asset being priced is the full U.S. yield curve.

The stronger counterargument is simple: show me the persistent market damage. The Peterson Institute evidence is a real check on my concern, because long-run inflation compensation did not de-anchor through the 2025 pressure episode Peterson Institute for International Economics³. The Fed also kept talking and acting like a data-dependent inflation-targeting central bank, not a White House desk Federal Reserve². If the question is whether markets have already stopped believing the Fed can fight inflation, my answer is no.

But if the question is how vulnerable the Fed is to sustained White House pressure, my answer is: more vulnerable than the calm market aggregates imply. The channel is not a single tweet. It is (1) threats to fire or sideline officials, (2) investigations that create pressure points, and (3) appointments that convince investors the future committee will prefer short-term growth over inflation control. Powell’s June 2026 warning pointed to exactly this institutional path, including concerns about a criminal investigation into the Fed’s renovation project and the attempted firing of Governor Lisa Cook Axios¹. Whether those actions succeed is not the only issue. The fact that senior Fed officials and investors must game them out is itself part of the cost.

Cross-country evidence gives that concern teeth. A 2026 IMF working paper studied 132 central-bank governor transitions across 28 advanced and emerging-market economies since 2000 and found that politically motivated leadership transitions were associated with lower nominal and real short-term rates and higher expected and realized inflation; it also found that long-term inflation expectations rose especially when incoming governors held unorthodox monetary-policy views International Monetary Fund⁹. The United States is not Turkey, Argentina or an average country in a panel dataset. Its markets are deeper, its institutions stronger and its dollar more central. But the mechanism is not foreign. If investors believe monetary leadership has been selected for loyalty to rate cuts, they will price easier policy before the first meeting.

The old Nixon-Arthur Burns story still hangs over this debate for a reason. Research in the Journal of Economic Perspectives documents how President Richard Nixon pressured Fed Chair Arthur Burns for expansionary policy before the 1972 election American Economic Association¹⁰. The Great Inflation had many causes, and no serious account should reduce it to one president bullying one Fed chair. But the lesson is not that history repeats mechanically. The lesson is that once the public believes monetary policy is serving incumbents rather than price stability, rebuilding credibility is brutal. Paul Volcker’s early-1980s disinflation was the expensive repair job after the credibility break.

My verdict is that the Fed’s credibility is resilient to rhetoric but vulnerable to capture. That distinction matters. If Trump attacks the Fed and the committee keeps setting rates based on inflation, jobs and financial conditions, markets can shrug. If attacks become removals, removals become vacancies, vacancies become loyalist appointments and loyalist appointments start changing dissents, dot plots and policy statements, the repricing will not wait for inflation to show up in the grocery aisle.

The indicator I would watch is not the next insult. It is the five-year five-year-forward inflation rate, the 10-year term premium, the dollar and the pattern of FOMC dissents after each appointment fight. If two or more of those move persistently in the same direction after a removal attempt or a politicized appointment, the stress test will have become a crack. My prediction is that rhetoric alone will keep producing episodic volatility, but the first successful removal or clearly political board majority would add a lasting premium to long-term Treasury yields within days, not months.