After the Federal Reserve cut interest rates at its last meeting of the year, two enormously important and interconnected questions remain unanswered for 2026: who will be the next Fed chairman and whether the central bank will remain independent.
In the face of the Trump administration’s repeated public attacks on the Fed, we often take the central bank’s independence for granted. But she was hard won.
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The big breakthrough came in 1951. For decades before that, the Fed functioned largely as an appendage of the Treasury and the White House—and during World War II it was a passive enabler of the policies of the Roosevelt and Truman administrations, keeping rates artificially low to finance deficit war spending.
By February 1951, inflation had soared to over 20%, a disastrous outcome that the Fed blamed on the Executive Branch.
After major political battles that culminated in an agreement in March 1951, today known as the Treasury–Fed Agreement, the Fed guaranteed that it would no longer be obliged to comply with orders from the Treasury and the White House, starting to operate according to its own criteria, as an independent central bank.
It could raise short-term interest rates to contain inflation if it deemed this politically unpopular action necessary, and it would no longer be forced to keep bond market rates artificially low.
This dispute for control of United States monetary policy, however, never completely ended.
It is being fought again now, in a series of contentious public fights, with huge implications for the cost of living, the dollar and the risks that need to be taken by long-term investors.
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Echoes of the past
President Donald Trump said he will nominate a name next month to replace Jerome Powell, the hard-pressed Fed chairman who has not cut interest rates as much as the president would have liked.
Interviews with candidates are ongoing, but Kevin A. Hassett, director of the White House economic council, is tipped as the front-runner. He has gone out of his way to support Trump’s stance on interest rates and many other issues.
But he recently told The Wall Street Journal that if he were Fed chairman, he would think on his feet and “just do the right thing.” Hassett added that he would not cut rates if ordered by the president to do so at an inopportune time — in effect asserting a degree of Fed independence.
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What I found surprising, after reading some history, is how much the Fed’s problems with the Trump administration echo those of the late 1940s and early 1950s under President Harry S. Truman, a Democrat.
Former president turned rebel
The Fed’s main building — which Trump says is undergoing a costly renovation under Powell’s leadership — is named after a central player in the Fed’s struggles for independence, Marriner S. Eccles.
The fascinating thing is that Eccles lost his position as Fed chairman, but remained director and became the main figure in the dispute with the White House.
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Stepping down as chairman but remaining director is a move Powell could, in theory, make next year, but he declined to say whether he would do so. Although his term as chairman ends in May, his role as Fed director could continue until January 2028.
Deutsche Bank evoked the example of Eccles in a recent research note: “Could Jerome Powell follow Marriner Eccles’ precedent?”
“Given President Trump’s past actions and his stated desire to exert greater influence over Fed policy,” noted note authors Peter Hooper and Matthew Luzzetti, “Jerome Powell may view remaining on the board of directors as crucial to protecting the Fed’s independence by offering stability and continuity amid potential political pressures.”
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Eccles offered more than stability and continuity. As director of the Fed in late 1950 and early 1951, he played a much more aggressive role in the dispute with the government than the president of the institution at the time, Thomas B. McCabe.
Eccles even leaked memos to The New York Times and The Washington Post — one of which served as the basis for a front-page story in the Times on February 4, 1951 — revealing the pressure and harsh tactics used against the Fed by the White House and the Treasury. “Truman Challenged by Fed Board,” read the Times headline.
Accompanying the report was a long memo from the Fed, approved by the institution’s board, describing what actually happened in a White House meeting between the Fed and the Truman administration.
The document made it clear that Truman was trying to force the Fed to adhere to cheap-money monetary policies that he did not agree with. This contradicted the administration’s public assurances that the Fed and the White House were aligned.
Openly opposing the president and the Treasury was a dangerous gamble. The Fed’s resistance was successful, in large part because of the geopolitical pressure that fell on the Truman administration at almost the same time, from North Korean and Chinese troops.
Congress held hearings on the military crisis. In the midst of all this, the government gave in to the Fed’s insistence that it be released to contain inflation, which the Fed said was being fueled by military spending and the Treasury’s insistence on keeping interest rates low to finance U.S. debt.
The context
The Fed had complied with the Roosevelt administration’s demands for debt financing—now known as a period of financial repression—during World War II. But the central bank grew restless in the early postwar years as deficit spending, low interest rates and rising debt helped drive inflation.
The onset of the Korean War—and the national security emergency that turned into the long Cold War, with the Soviet Union replacing Nazi Germany as the United States’ main adversary—exacerbated the country’s economic problems.
The Truman administration expected the Fed to promote U.S. national security interests, while the Fed insisted on protecting the value of the dollar, which it claimed was being put at risk by government policy.
Presidents continued to pressure the Fed, sometimes with great success. For example, recordings of the Watergate scandal revealed the acquiescence of Arthur F. Burns, then chairman of the Fed, to pressure from President Richard Nixon in 1971 and 1972. The Fed cut interest rates as ordered, and inflation soared, reaching 20% in 1980.
Paul Volcker, who became Fed chairman in 1980, contained inflation by raising interest rates to levels as high as 19%. He resisted pressure from the Reagan administration to lower rates in time for the 1984 election.
Powell cited the example of Volcker in 2022, when inflation spiked again, and promised to do whatever was necessary to control price increases. He still maintains that commitment.
Today, the Fed’s independence is commonly seen as a tradition, but it is not set in stone.
In 2026, we may find out whether the Fed’s ability to function as it sees fit, for better or for worse, will survive the Trump administration’s disregard for this and many other American traditions.
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