Wall Street anticipates Trump’s Fed scheme to ‘backfire’ spectacularly—possibly even closing the door more tightly on rate cuts

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Wall Street believes the Oval Office’s scheme to coerce the Fed into compliance is improbable to succeed. In fact, they worry it could backfire so dramatically that rate cuts that might have occurred under Powell will be scrapped as the central bank upholds its independence.

Over the weekend, the Department of Justice issued grand jury subpoenas to the Federal Reserve in connection with Fed chairman’s Senate Banking Testimony regarding the renovation of Fed facilities.

This action might have been anticipated by realists—given that Trump has already made legal threats against other members of the rate-setting Federal Open Market Committee (FOMC)—yet it remains unprecedented. It follows a year of lobbying by Trump, who seeks FOMC rate cuts to boost economic activity and lower borrowing costs, disregarding inflation risks.

Throughout 2025, even as Trump threatened to dismiss him on multiple occasions. The FOMC did implement rate cuts, though evidently not swiftly enough for Trump. This escalation from the White House is, analysts and investors concur.

However, Trump may not have considered that the FOMC (even with a new Fed chair this year) might aim to emphasize that independence and take steps to showcase it. As UBS’s Paul Donovan told clients this morning: “Any nominee put forward by U.S. President Trump will likely need to stress their independence further to prove they are beyond political influence. This could affect future policy choices.”

As Bernard Yaros, lead U.S. economist for Oxford Economics, observed in a note yesterday: “The criminal probe … could even backfire by making officials more hesitant to reduce rates in the months and years ahead.”

But there’s another unforeseen consequence Trump is unlikely to welcome: Powell may opt to remain after a new Fed chair is nominated. Though his tenure as Fed chair ends this year, his term on the Board of Governors continues. “If Powell was seeking a reason to stay on as a Governor … this could be it,” noted Deutsche Bank’s Jim Reid this morning. “Staying on is highly unusual, but [former Fed Chairman Marriner] Eccles did so from 1948 for 3.5 years to help safeguard Fed independence after the Treasury sought to finance large post-war debts.”

An unpopular plan

Investors might have hoped Trump had learned from past mistakes regarding Fed interference: When he threatened to oust Powell earlier this year, markets reacted nervously, prompting the Republican president to reverse course quickly.

According to reports, this week’s action hasn’t been widely popular within the White House. A report, citing two anonymous sources, indicates that Treasury Secretary Scott Bessent told the president the investigation “created a mess,” which could harm financial markets.

Even if President Trump prevails, successfully removing both Powell and Governor Lisa Cook, and installing a dovish Fed chair, there will still be economic repercussions. These could involve a weaker dollar, a steeper yield curve, and elevated long-term inflation expectations, says Thierry Wizman, global FX and rates strategist at Macquarie Group. If Trump succeeds, “it might lead to a Fed more compliant with White House demands, particularly if Congress abdicates its role. That would mean a Fed keeping interest rates lower than they would otherwise be.”

This implies that inflation, currently contained by higher rates, may rise over the long term, making “nominal assets like fixed-coupon long-term bonds less appealing as stores of real value.”