WHEN Donald Trump is making economic policy, a reprieve is little more than a pause for breath. In February investors cheered when he postponed tariffs on Canada and Mexico; by April he was torching the global trading system. So it is with his latest about-face. On April 22nd the president declared that he had no plans to sack Jerome Powell, chair of the Federal Reserve, having spent the week threatening to do just that. Is central-bank independence back? Only until the president’s mood swings again, or a different adviser has his ear.

Mr Trump’s ultimate desire is not in doubt. The Fed has cut rates by only a percentage point since September, to 4.25-4.5%. Mr Trump, like most businessmen, dislikes tight money, and covets the lower rates in Europe and elsewhere. And, by contrast with his first term, when the economy was mostly strong, he now faces the threat of a recession caused by his own foolish trade policy. That leaves him in search of a scapegoat. Mr Powell, whom he calls a “major loser”, is candidate number one.

The Fed thus remains vulnerable—at precisely the time when it must tackle an acute policy dilemma. Lower rates would indeed help America’s economy in one key respect. Consumer and business confidence are falling and financial markets already expect rate cuts worth at least three-quarters of a percentage point this year. A recession would typically call for more: the Fed usually lowers rates by four or five percentage points.

Today’s situation is far from typical, however. Tariffs are pushing up prices; some forecasters say inflation could reach an annual rate of 4% by the end of the year. And investors are losing confidence in America: the dollar is down by 9% against a basket of major currencies since its peak in February, the S&P 500 index is down by 14% and bond yields have been volatile.

This dynamic, more typical of an emerging market, complicates Mr Powell’s task. A central bank with a stock of credibility can afford to ignore temporary inflation caused by one-off events such as tariffs. Its promise of low long-term inflation would anchor wages and prices. But the Fed’s reputation has been dented by its slow response to inflation during the covid-19 pandemic, and is now threatened further by Mr Trump’s interference. Investors are pricing in inflation risk. A variety of surveys show households’ expectations for inflation rising, over the long-term as well as the next year.

The Fed, in other words, may no longer have much credibility to fall back on. Yet if it puts containing inflation expectations above fighting a recession, Mr Trump’s displeasure will grow. If the dollar sell-off becomes a crisis, the situation could become excruciating. The Fed might have to choose how much money to lend to stressed financial institutions and even to foreign central banks, while trying to adhere to its mandate and keep its distance from Mr Trump.

Whether or not Mr Trump chooses to sack Mr Powell, a new chair will be appointed in May 2026. But Mr Trump cannot easily dominate the Fed. The Senate must confirm his choice (which explains why the current front-runner, Kevin Warsh, is a mainstream candidate known as an inflation hawk). Monetary policy is set by a 12-member committee. Even if the Supreme Court concurs with Mr Trump in a separate case that he can fire agency chiefs for policy choices, it has hinted at a carve-out to preserve the Fed’s autonomy. And Mr Powell could choose to stay on the Fed’s board under a new chair until 2028.

Yet constraints on Mr Trump are also potential flashpoints. A committee might restrain an errant chair, just as the markets seem to hold back Mr Trump. But using market scares to guide policy, rather than sound leadership and good judgment, is a recipe for making America vulnerable to confusion and instability. This week’s relief could be quickly forgotten. ■

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