Global financial markets and governments look to the Federal Reserve.
So when President Donald Trump said that its chair, Jerome Powell, was a “major loser” whose “termination cannot come fast enough” investors reacted negatively.
In the US, stock prices slid downward as negative sentiment about the knock-on effects of US politics on the stability of a 112-year-old institution dominated trading.
Trump has since partially retracted his comments, telling reporters in the Oval Office on Tuesday he had “no intention” of sacking Powell, whose formal tenure ends in May 2026. US stocks rose as a result.
He did, however, reiterate his desire for Powell to lower interest rates, which Trump did in his first term, that time using Twitter
For some commentators, this still crosses a line.
“Once you have an independent central bank, it has to remain independent,” says Jamie Constable, chief market strategist at Singer Capital Markets.
“Otherwise the markets will very much get the jitters, and we saw that as soon as he [talked about] termination.”
For more on US monetary policy, see the latest article on Morningstar.com, Why the Fed’s Independence Matters.
Lessons from Former Prime Minister Liz Truss
UK investors could be forgiven for thinking Trump’s Federal Reserve barbs are an event unique to the US. But this kind of sniping has occurred relatively recently.
“The economic establishment used its huge and unrivaled influence over the markets to undermine confidence in the elected government.”
So argues former prime minister Liz Truss in her book, describing the ill-fated “mini-Budget”, which caused a UK gilt and sterling selloff that brought down her government after just 49 days.
In the book, Truss blames the Bank of England for destabilizing the bond market by selling £40 billion in gilts before Chancellor Kwasi Kwarteng made his tax cuts announcement.
Is the Bank of England Taking Its Lead from the Fed?
It is easy to laugh Truss off now, and UK political satire still references that era. But it was no joke at the time. And it was no trivial matter to the incoming government that replaced Truss in Downing Street in late 2022.
At his first fiscal speech in November 2022—just days after the mini-Budget drama—new chancellor Jeremy Hunt reiterated the government’s commitment to central bank independence in an Autumn Statement aimed firmly at the markets.
“The Bank of England, which has done an outstanding job since its independence, now has my wholehearted support in its mission to defeat inflation and I today confirm we will not change its remit,” he said.
Now that a Labour government is in office in the UK, a repeat of this sorry affair feels unlikely, even though lower interest rates would help stimulate a tepid economy. In Europe, consumers have seen the benefit of six rate cuts, versus just two in the UK. Interest rates here are still around two percentage points higher than in the eurozone.
After all, Bank independence was a Labour policy. But the party may not face voters again until summer 2029 at the latest.
And it was born of an earlier, very political, emergency.
Lessons from 1992: The Markets Won
By 1992, the UK economy was in crisis. Interest rates had risen to 12% and then hit 15% as the government fought to keep pound sterling in the European exchange rate mechanism, or ERM. It was eventually for naught. The UK left the ERM and Chancellor Norman Lamont was forced to resign.
Currency traders had bet against the government’s ability to manage the crisis, and they made a lot of money in the process.
Dubbed “Black Wednesday”, this was more than just a political embarrassment for the then-Conservative government. It was, one academic says, a watershed moment for the relationship between central governments, central banks, and markets: the Bank of England was granted independence in 1997 and it has remained so since.
“The true legacy of Black Wednesday is that it was the day the state fought the markets, and the markets won,” says Alexis Stenfors, a former trader-turned reader in economics and finance at Plymouth University’s school of economics and finance.
“Financial markets grasped power, and few have dared to challenge them since.”
This may explain why Trump has rolled back on his earlier comments.
“Market confidence is already fragile, and even if Powell intended to cut rates, the decision is now complicated by questions over the Fed’s independence,” says Darius McDermott, managing director at Chelsea Financial Services.
“Thankfully, Trump—or at least the people around Trump—understand that you cannot mess with the bond market. As many commentators have noted, his recent 90-day tariff pause was essentially a response to bond market instability.
“Usually, investors flee equities for the safety of US Treasuries during volatility, but when both stocks and bonds fell simultaneously, alarm bells rang loudly enough for Trump to apply the brakes. We can only hope Trump remains receptive to such reason.”
The Bank of England’s Position Could be Stronger
There’s no cause for complacency though. Singer’s Constable still believes the Bank of England’s independence could be strengthened with a Fed-style employment mandate. Currently the Bank targets inflation at 2%, a job it’s only been partially successful at; inflation has started to fall back towards this target, but is expected to rise again.
“At the moment it’s a very one dimensional mandate, isn’t it?” he says.
“I don’t think the Treasury would be criticized for [expanding it]. Having a very one-dimensional mandate focused on one indicator doesn’t give them any leeway at all in terms of what in terms of what they’re doing.
“It’s made worse by the fact that in the UK inflation is very much driven by the energy price and the gas price.”
And as for the Fed, it’s not too much of a leap to see Trump’s criticism aiding Powell’s position. For his part, Powell has refused to bend to the political pressure.
As one economist commentator, Tony Yates, himself a former Bank of England official, said of Truss’s attacks on Andrew Bailey:
“If you’re thought of in a bad way by an idiot, then that’s a good thing.”
Antje Schiffler contributed to this story
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
