Trump is making the next Fed chair’s job even harder

But even though he backed off from an implied threat to terminate Powell, Trump’s conduct underscored how the bigger loser from his pressure campaign could be whomever the president chooses to take Powell’s job next year.

Trump’s demand that the Fed lower interest rates could undermine investors’ confidence in the next Fed chair, economists and former U.S. policymakers say. Investors could question whether Powell’s replacement has made some understanding to consult with the president on interest rates. Powell’s term as chair ends in May 2026.

Business and consumer confidence has tumbled amid heightened uncertainty over trade policy. Higher tariffs on U.S. trading partners, meanwhile, threaten to put the Fed in a bind if tariffs send prices up after several years of elevated inflation. “It’s a difficult place for a central bank to be, in terms of what to do," Powell said last week.

Trump told reporters Tuesday that he had “no intention" of firing Powell after markets fell and the dollar weakened amid concerns the White House might seek to oust the Fed leader. The day before, Trump had posted on social media, “There can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW."

“There is no way you can denigrate a person like that and then turn around and expect the market will assume that the person you pick as his replacement will have amazing credibility," said John Silvia, president of advisory firm Dynamic Economic Strategy and a former chief economist to the Senate Banking Committee.

Since the Fed broke the back of high inflation in the 1980s, officials have prized the central bank’s independence from the White House because that tends to make its interest-rate policy more effective. Beginning with President Bill Clinton in the 1990s, presidents took a hands-off approach to the Fed because they recognized that painting central bankers into a corner would make it harder to get their way.

“Public Fed bashing by presidents is a fool’s game. The Fed doesn’t listen, or it does listen and feels pressure to prove its independence, which means the same or higher short-term interest rates," said Lawrence Summers, who was Clinton’s Treasury secretary from 1999 to 2001. “The market does listen and is just made nervous, which means higher long-term rates."

While the Fed controls short-term interest rates, other rates or asset prices can be sensitive to comments by Powell or other Fed leaders when they tease out changes in their economic outlook or how those changes could influence the future setting of interest rates. If investors were to believe the central bank had been captured by the president, then statements by the president could end up influencing interest rates, undermining the Fed’s agency.

Trump’s latest attacks on Powell “certainly will leave the shadow of suspicion over the next chair. You can’t unsee a very threatening posture toward the Federal Reserve," said David Wilcox, an economist at Bloomberg Economics and the Peterson Institute for International Economics.

The “overwhelming likelihood" in the eyes of financial market participants is that the next chair “will have given President Trump strong reason to believe that as dissatisfied as he was with the conduct of monetary policy under Chair Powell, that he’ll have reason to be satisfied" with the new pick, said Wilcox, a former senior Fed adviser.

Kevin Warsh, a former adviser to President George W. Bush, was a Fed governor from 2006 to 2011 and is seen as a contender for the Fed job.

Trump applied sustained public pressure on the Fed to cut interest rates in 2019, during his first trade war. The Fed ultimately lowered rates, though not as fast as the president wanted, because Powell and his colleagues judged the hit to business investment might swamp any effects of higher prices from tariffs.

Trump elevated Powell, then a Fed governor, to serve as Fed chair for a term beginning in 2018, and President Joe Biden reappointed Powell to a four-year term that began in 2022.

Trump will have the opportunity to begin remaking the Fed next year by replacing at least one Fed governor and tapping one of the seven governors to serve as chair. Powell has the option to remain on the Fed’s board until early 2028.

Trump is already making his mark on the central bank. In February, Fed governor Michael Barr surrendered his position as vice chair of bank supervision after Trump officials threatened to fire him. Trump has nominated Michelle Bowman, a Fed governor he appointed to the board in 2018, for that post.

Trump’s power to reshape the Fed by picking the next chair faces important checks.

Michelle Bowman is Trump’s nominee for vice chair of bank supervision.

The Fed chair’s power rests in part on his or her ability to fashion a consensus and lead an at-times unruly group of 12 reserve bank presidents and six other governors. The Fed chair has just one of 12 votes on the rate-setting Federal Open Market Committee, which includes all seven Washington-based governors and a rotating group of five of the regional bank presidents.

As a result, the Fed chair is akin to the quarterback of a football team. They can call the play, but they can’t guarantee everyone will run the desired route.

“There is a limit to what Trump can do with his own Fed chair. The more extreme the person he picks, the less they will be able to bring the FOMC along with them," said Jason Furman, a former top economic adviser to President Barack Obama.

Absent Trump’s being given the power to fire Fed governors that he currently lacks, “the system has enormously powerful checks built into it, and while there is less deference to the chair than there used to be, the committee won’t have any deference to a chair who is a completely political actor," said Furman.

President Richard Nixon privately pressured his Fed chairman and former adviser, Arthur Burns, to ease policy ahead of the 1972 election, according to Oval Office recordings. Burns acceded, and the Fed spent the rest of the decade struggling to corral high inflation.

“I respect his independence," Nixon said when he introduced Burns as his pick in 1970. “However, I hope that independently he will conclude that my views are the ones that should be followed."

In 1978, President Jimmy Carter named G. William Miller to follow Burns, but Miller proved so ineffective with his colleagues and out of his depth on monetary policy that Carter moved him over to run the Treasury Department the following year. Carter replaced Miller with Paul Volcker.

Treasury Secretary Scott Bessent said last week that the administration would begin interviewing candidates for the Fed job this fall. Leading contenders include Kevin Warsh, a former adviser to President George W. Bush who was a Fed governor from 2006 to 2011, and Kevin Hassett, director of the White House National Economic Council. Bessent is also seen as a possible contender for the job by some Fed watchers.

In a 2010 speech, Warsh said he was confident “any attempt to influence inappropriately the conduct of Fed policy would yield a strong and forceful rebuke by Fed officials and market participants alike." He added, “The only popularity central bankers should seek, if at all, is in the history books."

Fed governor Christopher Waller, who was appointed to his current post by Trump in 2020, says the question of how the central bank manages to retain its independence will depend on the next chair.

Fed governor Christopher Waller, who was appointed to his current post by Trump in 2020 and who some analysts believe has an outside shot at succeeding Powell, said Thursday that the question of how the central bank manages to retain its independence will depend on the next chair.

“Are they going to come in and keep the tradition of central bank independence, making policy in a nonpolitical way? For me, that’s critical…whoever the next chair is," he said in an interview on Bloomberg Television.

Waller said Trump’s criticism of the Fed wouldn’t influence how officials do their jobs. “If you don’t like to be criticized, don’t take the job," he said.

Write to Nick Timiraos at Nick.Timiraos@wsj.com