Where will the Fed go: Loyal to law or to Trump?

Editor's note: He Weiwen is a senior fellow at the Center for China and Globalization. The article reflects the author's opinions and not necessarily the views of CGTN.

US President Donald Trump's nomination of Kevin Warsh as the next chairman of the US Federal Reserve (Fed) on Friday immediately triggered an unprecedented crash in world gold and silver markets, with gold spot off 12 percent, to $ 4720 per ounce and silver by an astonishing 34.67 percent to $ 75.38 per ounce. The dollar rose by 0.7 percent. The Hawkish record of Keven Warsh, especially his explicit stance on Fed balance sheet tapering, caused a wide expectation of dollar and dollar asset strengthening and the role of gold and silver weakening.

While watching closely the trends of this week, if there is a rebound in gold and silver markets, we need to watch equally closely if there will be fundamental changes in Fed policies and moves when Warsh becomes the new chairman in late May, if approved by the Senate. Namely, will the Fed continue to stick to its mandate by the 1913 Federal Reserve Act, independent of the White House, or ultimately loyal to President Trump? There are all reasons for this concern as Trump had said explicitly that he would not nominate anyone unloyal to him as the new Fed chair, and that he hoped Warsh will cut the Fed rate.

The heated disagreement between Trump and Jerome Powell, the current Fed chairman, focuses on the Fed rate cuts. Trump has exerted all his pressure on Powell for a fast rate cut, to just one percent. He even went that far as to let the federal prosecutor launch a law suit to Powell for the budget of the Fed building renovation, and fired Lisa Cook, a Fed board member (now pending the ruling of the US Supreme Court). However, Powell has been sticking to the mandate and objective of the Federal Reserve Act, the objective of which includes two basic aspects: Firstly, to keep price stability, with a 2 percent CPI as the threshold. Normally, the inflation rate above 2 percent does not trigger a rate cut. On the contrary, it might trigger a rate hike when it shows a rising trend. Secondly, to support full employment, a rising jobless rate supports a rate cut, and a falling or stable jobless rate does not. Following this standard, the Fed cut the rate three times in 2025 very moderately and kept the rate unchanged in January 2026, leaving the Fed rate at 3.50-3.75 percent, far from the 1 percent demanded by Trump.

The basic reasons for the Fed rate decisions over the past year are the economic data on inflation and employment. Since Trump returned to the White House and launched a tariff war on the world, there has been a moderate rise in the CPI and PPI. Before Trump Term II, the US CPI already came down to 2.3-2.4 percent in December 2024, very close to the 2 percent threshold, hence justifying a moderate rate cut. However, the CPI rose somewhat after the "reciprocal tariff" was imposed in August 2025, ending the year 2025 at 2.7 percent, instead of a clear falling trend. And the PPI in December 2025 even rose by 3.0 percent year on year and 0.5 percent month on month, a clear acceleration at the year-end. Hence, the inflation data did not justify a rate cut, and the Fed kept the rate unchanged at the meeting of the Federal Open Market Committee (FOMC) in January, 2026. The second threshold, the jobless rate, saw a moderate rise from 4.0 percent in January to 4.4 percent in December, 2025. However, it did not symbolize an obvious economic downturn as the GDP hit 4.3 percent growth at an annual rate in Q3, 2025. Hence, a moderate rate cut.

Over the past 113 years, since the Federal Reserve Act took effect in 1913, the White House has not intervened in Fed decisions. In 1992, George H. Bush, at the height of his reputation after the victory in the Gulf War, lost the presidential election to Bill Clinton because of the economic downturn. Bush requested Alan Greenspan, then Fed chairman, to cut the Fed rate to prop up the economy, and thus supported his re-election. However, Alan Greenspan stuck to the high Fed rate strictly based on the Federal Reserve Act. Bush had no choice but to respect Greenspan's decision and lost the campaign.

Trump, on the other hand, has neither knowledge nor interest in the Federal Reserve Act, nor discipline in the Fed's independent legal status. What he wants is even a 1 percent Fed rate, to bring down the huge federal budget deficit (every percentage point Fed rate cut could reduce the federal deficit by approximately $300 billion). What is more, to prop up the stock market and growth rate to show "success" to his constituency base. In early 2020, when the pandemic broke out and the economy was in a nosedive, under the strong pressure from Donald Trump, Jerome Powell yielded and cut the Fed rate to zero at one stroke and started the unlimited quantitative easing, thus igniting the hypo-inflation.

Kevin Warsh, whose father-in-law has been a close friend of Trump for decades, is most likely to follow Trump's rate cut demand. It is most likely that Warsh will act in a more "professional" and balanced way. He has claimed a further Fed balance sheet tapering, reducing liquidity supply, and thus strengthening the dollar. On the other hand, he will most likely, immediately after taking office in May, start Fed rate cuts as early as at the FOMC meeting in June, and continue with further rate cuts. Jerome Powell did balance sheet tapering for most of 2025, which only ended on December 1, 2025. By that date, the Fed balance sheet was at $ 6.6 trillion, approximately 50 per cent larger than that in 2015. However, the US economy was two-thirds larger than 10 years before as well. We have to watch closely how he will lead these cuts: Strictly based on the latest inflation and jobless data set by the Federal Reserve Act, or simply cut rates on his own narrative, to meet Trump's demand.

The Fed will be at a historic juncture: Loyal to the Federal Reserve Act, serve the American economic stability, or loyal to the president, for his own needs, deviating from the Fed's legal mandate. Any change, even dedicate, will change the role of the Fed and create significant uncertainties for the financial stability of America, and of the world at large.

(Cover via VCG)