By:
Muhammad Edhie Purnawan
Department of Economics, FEB UGM
Prolog
Trump and Powell have been friends in the past. Trump proposed that Powell become the Fed chairman on November 2, 2017, his first term as the American President. After some time, Trump became Powell’s opponent, and then Trump wanted to fire Jay, although later softened. This was expressed several times in front of the media. These two captains are currently navigating the same ship. However, they are at odds with each other.
Trump is like a tough sailor who wants to move the ship forward quickly. He uses tariff indicators and fiscal stimulus to steer his ship. All for the greater good. Moreover, he uses the preamble to the US Constitution and the Employment Act of 1946 to act. On the other hand, Powell navigates the same ship with great care to keep the ship and its passengers stable. He uses data compasses and policy maps for maximum employment. Powell’s adherence to the Federal Reserve Act and the Humphrey-Hawkins Act is not in doubt.
Donald John Trump, the successful businessman and television star, became the 45th President of the United States in 2017 and the 47th in 2025, bringing an unconventional, high-profile leadership style to the White House.
Unlike his political or academic predecessors, Trump rose from real estate and entertainment, building a business empire under the iconic “Trump” brand before entering politics. With his bold and often provocative approach, he defied tradition by openly criticizing Federal Reserve policy, pressuring Fed Chairman Powell to lower interest rates through tweets and inflammatory statements.
Trump championed a deregulatory agenda and aggressive trade wars, imposing tariffs on trading partners like China and fueling global economic uncertainty.
Despite the controversy, his disruptive approach-from unusual Fed nominees to tough trade negotiations reflects his vision of shaking up the status quo and prioritizing US interests.
Unlike Trump, Jerome Hayden “Jay” Powell is a Princeton and Georgetown Law graduate and former law journal editor who brought fresh color to the Federal Reserve chairmanship in 2018. Unlike his predecessors, who had Ph. D.s in economics (a plus), Powell has a wealth of experience in investment banking, private equity at the Carlyle Group, and senior positions in the George H.W. Bush-era Treasury Department.
With a pragmatic approach, he has led the Fed with a strong commitment to independence, navigating the complexities of post-quantitative easing and the market turmoil 2013.
Initially skeptical of asset purchases, Powell changed his mind as data demonstrated their benefits, allowing him to accept evidence. His early focus on monetary policy and his immersion in the technical details of financial regulation opened a transformative new chapter.
Unfortunately, there is often conflict between the President and the governor of the US central bank. Trump again stated that he wanted to fire Powell in early 2025, but then he recently reversed course and did not fire Powell because there was no way to do it. However, as in the first Trump period, he may reverse course later and want to fire again. Furthermore, Powell insisted on serving until 2026.
Their clash is like two huge waves colliding, certainly rocking the big ship of the US economy. Moreover, this has been going on for several days. It is not personal; it is a battle of two visions. Should the economy serve short-term political ambitions or maintain a longer-term balance?
We can draw lessons and wisdom to understand the dynamics of the relationship between the President and the governor of the US central bank. Therefore, we need to learn from their interactions now and in the past.
This is why we can refer to the monumental work of Alan S. Blinder, Deputy Governor of the Fed (1994-1996), Professor of Economics at Princeton University. His work is monumental: A Monetary and Fiscal History of the United States, 1961-2021 (2022). Blinder presents an authoritative narrative of six decades of US monetary and fiscal policy, from the Kennedy era to Biden’s response to the pandemic.
Based on his insider experience, Blinder outlines the complex interactions between twelve presidents and eight Fed governors, including William McChesney Martin and Jerome Hayden Powell. He also traces key events such as the stagflation of the 1970s, the rise of Reaganomics, the 2008 financial crisis, and monetary policy during the Covid-19 pandemic. With a focus on long-term change, Blinder not only provides insights into the history of the US economy but also offers valuable lessons for understanding today’s Trump-Powell tension.
Roots of Political Conflict
Trump sees economic growth as a reflection of the success of his leadership. In The Art of the Deal (1987), he emphasized the reliability of instinct and negotiation as key elements. In 2017, he launched the Tax Cuts and Jobs Act, which cut corporate taxes from 35 percent to 21 percent, encouraging investment and spending despite a rising budget deficit (April 2025).
In mid-April 2025, Trump imposed high tariffs-up to 145 percent and then 245 percent on Chinese imports, 32 percent on Indonesian products, and 10 percent on all imports, according to the White House-to protect domestic industries (mainly steel and autos) and reduce the $1.2 trillion trade deficit (Politico, February 5, 2025).
However, experts expect these tariffs to increase unemployment by 0.6 percent, or about 770,000 lost jobs and raise consumer prices by 3 percent, disrupting global supply chains and triggering the risk of recession (CSIS, 2025), which signals symptoms of stagflation—high inflation combined with slow economic growth.
In addition to this conflict, since 1961, the relationship between the US president and the Fed governor has shifted from strong political influence to mature central bank independence.
Blinder examines periods when fiscal and monetary policy were aligned or at odds, providing valuable lessons for the current dispute, in which Trump has again said he wants to fire Powell, who seems indifferent to the Fed governor.
So, how did the public react to this before today? An interesting study by Kuttner and Posen (2007) examines how much the market cares about a central bank governor. Their paper “Do Markets Care Who Chairs the Central Bank,” published in the NBER Working Paper Series, shows that the market closely follows the appointment of a central bank governor by the US president. Then, after some time in office, the market carefully assesses the new governor’s policy preferences based on the available information.
In the Nixon-Burns era as President and governor of the Fed, the relationship between the two showed dangerous political interference. Nixon appointed Burns, a close ally, in the hope that Burns could keep interest rates low to support his re-election in 1972. Burns fulfilled Nixon’s expectations with a loose monetary policy, increasing the money supply M1 and M2 and lowering the federal funds rate to 3.5% in January 1972.
As a result, economic growth surged, but inflation rose, triggering the post-OPEC oil shock stagflation of 1973. This conflict illustrates how political pressures undermine long-term economic stability.
By contrast, the Clinton-Greenspan era of the 1990s showed effective engagement. Clinton pursued deficit reduction, while Greenspan cautiously adjusted interest rates, kept inflation low, and promoted economic growth. In 1993, Clinton followed Greenspan’s advice to cut the deficit by $140 billion. This triggered a bond market rally and lower interest rates, stimulating a long economic expansion.
This cooperation resulted in a “long boom” of low inflation, minimal unemployment, and strong growth. We can learn from both the benefits of coordination between the two that do not compromise the Fed’s independence.
The Carter-Volcker era was different. In the late 1970s, Carter asked Volcker to fight inflation. Although Volcker’s policies at the time were super-tight – he raised the federal funds rate to 17.6 percent in 1980, causing a recession – Carter still supported him. They prioritized long-term economic stability. The Fed’s independence was strong, even if it hurt Carter politically. This was in contrast to Nixon-Burns when political pressure entered the monetary sphere.
In the Reagan-Volcker era, the President initially supported Volcker to curb inflation, but Reagan’s fiscal policy became too expansionary. He cut taxes and increased defense spending. This conflicted with Volcker’s tight monetary policy (even the FFR was 19.1 percent in June 1981). Tensions had risen when the President’s staff tried to influence Volcker not to raise interest rates before the 1984 election. But Volcker budged. The Fed remained independent.
Ultimately, the overall result of the Volcker-Reagan cooperation was to reduce inflation after a large budget deficit due to the 1981-1982 recession.
Moreover, Powell’s leadership continues to be tested by Trump’s unusual verbal attacks, which break with the tradition of a president who usually exercises restraint. From tweets criticizing rate hikes to threats of demotion, Trump has shaken the Fed’s independence through tweets criticizing rate hikes and threats of demotion. In response, Powell has used wit and civility, regularly holding press conferences to explain the policy in plain language, working diligently with Congress to build bipartisan support, and refusing to rise to the provocation. In 2019, he even pulled off a brilliant maneuver-stopping rate hike and made three “insurance” cuts in response to trade war uncertainty and an inverted yield curve, preventing an economic slowdown. At the same time, he led the Fed’s strategy review with a “Fed Listens” event that engaged the public and reinforced an inclusive and data-driven approach. This is very inspiring.
Otherwise, Powell focuses more on long-term stability. As a Fed governor, he works to keep inflation low and employment as high as possible.
In a speech in Jackson Hole, northwestern Wyoming, on Tuesday, July 17, 2018, Powell emphasized that his decisions are always data-driven and not based on political pressure. His approach succeeded in keeping inflation below 2.5 percent at the time amid Trump’s escalating fiscal stimulus overreach.
Classical Fiscal-Monetary Tension
In On the Theory of Economic Policy, Jan Tinbergen, the 1969 Nobel laureate in economics, stated that to achieve a set of economic objectives such as growth, employment, and price stability (the three objectives)-the government needs at least as many or more policy instruments than the number of objectives—for example, fiscal policy, monetary policy, and interest rate policy (3 instruments).
Then, Trump used tariffs and tax cuts to stimulate growth and increase employment. Powell, on the other hand, focuses on interest rates and money supply to achieve price stability. These are apparent opposites. Monetary and fiscal economic theory helps us understand this conflict.
The Fiscal Theory of the Price Level, citing Leeper (1991) among others, argues that fiscal policy, such as Trump’s tariffs, can affect the price level if the government budget is not balanced. These tariffs increase import prices, pushing up inflation and making it challenging for Powell to keep the inflation target around 2%.
The views of monetarist Milton Friedman, the 1976 Nobel laureate in economics, in The Role of Monetary Policy, actually support Powell. Friedman emphasized that monetary policy is the primary tool for controlling inflation, not short-term economic growth. Powell protects the economy from a destructive inflationary spiral by focusing on price stability, reflecting Friedman’s discipline. This principle has become a bulwark for Powell in the face of political pressure, ensuring the economic ship remains stable amid uncertainty.
Meanwhile, Robert Lucas, also a 1995 Nobel laureate in economics, warned in Econometric Policy Evaluation (1976) that people’s rational expectations can reduce the effectiveness of policy, so the authorities must carefully manage the expectations of economic agents, as they can trigger higher inflation expectations and thus weaken efforts to stabilize prices.
The uncertainty brought about by Trump’s aggressive tariff policy has undoubtedly complicated these challenges, compelling Powell to strengthen his communication with the market to anchor inflation expectations. Accordingly, Powell’s data-driven approach has become increasingly essential to maintaining market confidence and preventing inflation from spiraling out of control.
From an international trade perspective, Paul Krugman, Nobel Laureate in Trade (2008), in Increasing Returns and Economic Geography, emphasizes how trade disruptions—such as tariffs—can trigger price increases that exacerbate inflationary pressures and undermine broader economic stability. Protectionist policies, for instance, disrupt the flow of goods and complicate central banks’ efforts to maintain price stability. Krugman warns that the scale effects in global trade can amplify these negative impacts, as supply chain disruptions tend to trigger a domino effect that intensifies price instability in international markets.
The Threat of Stagflation
Stagflation—a combination of high inflation and slow economic growth—is a real threat. In the 1970s, President Nixon’s pressure on Federal Reserve Chairman Arthur Burns to keep interest rates low triggered double-digit inflation, as noted by Meltzer in A History of The Federal Reserve.
A similar conflict has emerged between Trump and Powell, with Trump pushing for expansionary policies that risk worsening inflation. Barsky and Kilian (2004) argue in the Journal of Economic Perspectives that global monetary expansion and demand-side shocks, rather than an oil supply shock like the OPEC embargo, explain the stagflation of the 1970s. Similarly, Trump’s tariffs in 2025, which rose from 145% to 245% on Chinese imports, created comparable shocks by driving up import prices and slowing global trade.
The Current Policy Perspectives report from the Boston Fed in April 2025 noted that small and medium-sized enterprises expressed concern over the imposed tariffs, which would increase input costs and selling prices—echoing Powell’s concerns.
According to the US Bureau of Labor Statistics, Trump’s economic patriotism policy has boosted steel production by 8% since 2024 and created 198,000 jobs in the manufacturing sector. However, the U.S.-China trade deficit rose from US$279.4 billion in 2023 to US$298 billion in 2024.
Sudden tariff hikes have pushed consumer prices. They are expected to increase the financial burden on US households, even though Powell has managed to maintain stability by keeping inflation below 3 percent—bringing it down from 2.8 percent to 2.4 percent. Nevertheless, the looming threat of stagflation persists, challenging Powell to continue navigating the US economy through this storm of uncertainty.
To mitigate these impacts, a more potent policy mix—monetary policy, macroprudential measures, and fiscal policy—has become increasingly essential amid the growing complexity of challenges, particularly with elevated tariff levels that may further undermine economic stability.
Accordingly, during this 90-day pause, it is hoped that Trump will gradually simplify the tariff structure and shift toward tax incentives to support the manufacturing sector without disrupting the international trade architecture while also seeking to improve relations with the Federal Reserve Chairman.
Should pressure mount, Powell must also adapt his communication strategy, following the example of the European Central Bank’s Mario Draghi, who in 2012 famously pledged to do “whatever it takes” to save the euro—calming markets even without formal forward guidance. This demonstrated Draghi’s authority in managing expectations (Reuters, 2016).
Likewise, in dealing with Trump, Powell should consider engaging in informal dialogue—similar to that between Greenspan and Clinton—which could help align visions without compromising the Fed’s independence.
Rules-based policy frameworks—such as the Taylor, McCallum, Ball, Svensson, Walsh, Galí, and others—are fundamentally designed to reduce uncertainty. These frameworks have garnered strong support from Jerome Powell, who, despite his commitment to monetary rules, also underscores the necessity of coordinated fiscal policy to reinforce overall macroeconomic stability.
Powell’s leadership has consistently demonstrated a capacity to manage technical challenges with precision. For example, the 2019 repo market turmoil showcased his resilience and decisiveness. A miscalculation regarding adequate reserve levels triggered a spike in repo rates, but Powell swiftly intervened—expanding the Federal Reserve’s balance sheet and stabilizing markets through targeted operations.
This episode, alongside his adept navigation of trade tensions during the Trump-era tariff wars, highlighted Powell’s ability to balance short-term crises and long-term policy vision.
In 2020, his policies contributed to a soft landing for the economy, echoing Alan Greenspan’s success in the 1990s and further cementing the Federal Reserve’s role as a cornerstone of economic stability amid political turbulence.
As competing visions clash, the world watches closely: Will their vessel maintain its course and equilibrium or be torn apart by an increasingly uncontrollable storm? The tension between Trump and Powell reflects a broader struggle—between the pursuit of rapid growth and the imperative of enduring stability.
Donald Trump has aimed to stimulate domestic industry and job creation by sweeping tariffs on all imports. However, this aggressive trade stance has fueled inflation, which climbed to 3 percent as of January 2025. In contrast, Jerome Powell has remained steadfast in his efforts to anchor inflation closer to the 2 percent target, safeguard financial stability, and support job absorption—even though his statements have sometimes triggered market confusion (Bloomberg, 2025).
Without coordinated and synergistic policies, open dialogue, and clear communication, the threat of stagflation remains real. The US could face the dangerous combination of rising inflation, job losses or increasing unemployment, and a slowdown in overall growth.
Epilogue
Trump sails like a colossal fleet across the global economy’s ocean, unleashing rhetorical volleys that shake markets and international relations. He fully unfurls his sails of ambition, braves trade storms, and strives to draw world leaders into his orbit of dominance.
However, at the helm of the Federal Reserve stands Powell—a steadfast captain gripping the wheel tightly, navigating through financial whirlpools and political reefs, steering the US economy toward a horizon of stability.
The battle of wills between Trump and Powell has rocked the American ship of state. Trump’s threat to dismiss Powell sent shockwaves through the markets, causing a sharp decline in stocks and bonds. In such a power struggle, only one vision can prevail—there is no room for both. Otherwise, it is the markets that will once again pay the price. Indeed, the mere hint of Powell’s removal was enough to rattle investor confidence and shake the foundations of the US economy.
Ultimately, it became increasingly clear: even the President had to step back.
However, the unsettling truth remains—no one can truly predict the mood of The Don come tomorrow morning.
Jakarta, April 24, 2025
Respectfully,
Muhammad Edhie Purnawan
Sustainable Development Goals
