The Fed Tried to Avoid a Fight With Trump. It Got One Anyway.

Three weeks ago, Jerome H. Powell delivered a closely watched speech to central bankers, government officials and academics attending the Federal Reserve’s annual conference in Jackson, Wyo.

The Fed chair had been through an eventful few weeks. President Trump had flirted with firing him and then showed up for a rare visit at the central bank. One of the Fed’s seven governors had resigned unexpectedly. And as Mr. Powell made his way to Jackson Lake Lodge to deliver his remarks, Mr. Trump was demanding the resignation of another governor, Lisa Cook, over unproven allegations of mortgage fraud.

Each of these events on its own was destabilizing. Together, they represented the most direct infringement on the central bank’s independence in decades. Hanging in the balance was the Fed’s ability to set monetary policy free from political meddling, a longstanding separation that had become the backbone of the world’s largest economy.

Mr. Powell’s speech disregarded that threat. He deviated little from remarks that had been in the works for weeks, talking instead about the economic outlook for the United States, the trajectory for interest rates and the central bank’s blueprint for setting monetary policy. Never once did Mr. Powell utter anything about the Fed’s independence.

The omission did not go unnoticed, especially by those who had hoped the central bank would be louder in its opposition to what they viewed as an aggressive assault on the institution. But they had also grown accustomed to the Fed being exceedingly cautious about anything that involved Mr. Trump.

That prudence, which has only intensified since Mr. Powell’s speech, aligned with the Fed’s now decade-old playbook for handling a president who has made no secret of his desire to control the central bank and its power to set interest rates.

Inside the Fed, there is a preoccupation with doing whatever possible to avoid provoking the president, which on some occasions has meant complying with his demands. The strategy among officials and staff has been to try to ignore the cacophony and focus on their day jobs. Public statements are also getting a closer look, with in-house lawyers poring over each sentence to avoid drawing undue scrutiny.

Critics of that cautious approach say it has done little to insulate the institution from an existential threat.

“The thing about bullies is they keep hitting you until you fight back, and the Fed has allowed itself to be bullied by this administration time after time,” said Jeremy Kress, a law professor at the University of Michigan who used to work at the Fed. “And this would be a good time to stand up and take a position.”

But others say it is unrealistic to expect the Fed, a conservative institution by nature, to volley with a president who loves the spotlight and relishes a public fight. It’s even more unlikely at a time when congressional Republicans, corporate America and Wall Street have largely stayed silent.

“It’s hard to second guess their strategy because Donald Trump is a heavyweight champion in all-out public confrontation,” said Peter Conti-Brown, a professor at the Wharton School at the University of Pennsylvania.

But “we’re on a knife’s edge and a lot hinges on their strategy being right,” he added.

A Conciliatory Approach

The Fed, having used the lay-low strategy in Mr. Trump’s first term, turned to that approach when he secured a second term. But the problem is that Mr. Trump has been much more willing to shatter longstanding norms and push his campaign against the Fed further than many had expected.

The Fed continued to defend its primacy over policy decisions and tried to avoid getting sucked into fights it deemed peripheral to its primary goal of preserving policy independence.

In early January, Michael Barr, an appointee of President Joseph R. Biden Jr., resigned from his position as vice chair of supervision to avoid a legal battle with Mr. Trump. Days before the inauguration, the Fed pulled back from its involvement in climate initiatives.

After a flurry of executive orders, the Fed froze hiring and slashed head count. It downplayed its diversity programs.

Where it did not budge was on matters related to monetary policy. Despite an incessant barrage of attacks from the president, the Fed has kept interest rates steady so far this year. Policymakers are now poised to lower interest rates on Wednesday amid concerns about weakness in the labor market.

But even that is unlikely to placate the president, who wants borrowing costs to be drastically lower than the quarter-point cut that the Fed is expected to deliver.

The Summer From Hell

Still, the Fed stuck to its playbook. Donning a white hard hat, Mr. Powell escorted Mr. Trump through the active construction site. At one point, Mr. Powell challenged Mr. Trump’s estimate of the project’s cost but brushed aside the president’s request for lower borrowing costs, which came with a backslap.

A week later, the Fed held interest rates steady for a fifth straight meeting. Asked about the president’s criticism, Mr. Powell said that central bank independence “has served the public well,” but avoided responding directly to the issue of Mr. Trump’s conduct.

By that point, Mr. Powell had a new problem: Adriana D. Kugler, a member of the Fed’s Board of Governors who was also an appointee of Mr. Biden, was stepping down months before her term was set to expire.

Two days after the meeting, Ms. Kugler said she was returning to Georgetown University in what appears to have been a last-minute decision. She had been an active participant in briefings the week before the Fed meeting, and had been preparing for public events in the weeks ahead. Ms. Kugler, who did not respond to a request for comment, does not appear to be teaching any classes this semester.

Mr. Trump quickly filled the unexpected opening on the Fed’s board with one of his top economic advisers and a Fed critic, Stephen Miran.

Mr. Trump soon tried to create another vacancy — this time by going after Lisa Cook, a sitting governor, accusing her of wrongdoing.

The attack caught the Fed’s leadership flat-footed. The central bank was used to criticism, and it had dealt with ethical controversies before. That included several scandals in recent years involving officials’ financial transactions. But none involved the president trying to force out a Fed governor.

It took more than eight hours for Ms. Cook to respond after the accusations went public on Aug. 20. A statement released through the Fed’s communications staff said that she had “no intention of being bullied to step down” and promised to gather information to answer “any legitimate questions” about the allegations.

The Fed itself decided against issuing its own statement. The allegations against Ms. Cook related to personal dealings surrounding homes she purchased before joining the Fed as opposed to activities while carrying out her duties as a governor. She has since denied the allegations.

If the renovations controversy had been a warning shot, the attempted firing was seen as a direct attack. If the president could fire Ms. Cook based on unproven allegations, there was little preventing him from replacing other officials. Mr. Conti-Brown, at the time, called such a scenario “the end of central bank independence as we know it.”

Still, the Fed chose restraint. A statement the following day said that “long tenures and removal protections for governors serve as a vital safeguard,” but did not directly address whether Ms. Cook’s firing was lawful. When Ms. Cook filed a lawsuit later that week seeking to block her ouster, the Fed said only that it would “abide by any court decision.”

The Fed was limited in what it could say because the board and Mr. Powell himself were listed as defendants in Ms. Cook’s lawsuit. They were named to prevent the Fed from enforcing the president’s orders.

“It is in their DNA to be cautious,” Anil Kashyap, an economist at the University of Chicago’s Booth School of Business, said of the Fed. “This is an existential threat and maybe that calls for doing things a little differently, but they are just not wired like that.”

Even so, critics said the Fed’s response had been too tepid given the severity of the threat. Aaron Klein, a financial regulations expert at the Brookings Institution, said he understood that Mr. Powell and other Fed leaders were reluctant to do anything that might further provoke Mr. Trump. But he said they should have been more explicit about the legality of Ms. Cook’s removal and her status as a governor as the litigation proceeded.

“The Fed’s silence is complicity,” he said. “It’s becoming more and more difficult to defend the Fed’s independence when it won’t defend itself.”

Mr. Klein and other critics of the Fed’s approach are also worried about the precedent set by Mr. Trump’s appointment of Mr. Miran, who headed the Council of Economic Advisers.

Mr. Miran’s selection was not, on its own, a break from established norms. Ben S. Bernanke was C.E.A. chair when President George W. Bush named him Fed chair in 2005.

But unlike Mr. Bernanke and others who have made similar transitions, Mr. Miran said he would merely take a leave of absence from his White House post while at the Fed. Eric Winograd, an economist at the investment firm AllianceBernstein, called the arrangement “absurd,” saying it directly undercut Mr. Miran’s pledge to uphold the central bank’s independence.

The Fed has had to treat Mr. Miran’s appointment as business as usual. He recently visited the central bank to receive the standard briefing given to nominees. If the Senate confirms him on Monday as expected, he will be able to attend this week’s Fed meeting as a full voting member of the central bank’s policy-setting committee.

Fending for Itself

The Fed’s supporters say the central bank is under siege because others have failed to come to its aid.

“I think if the Fed yelled too loudly that it needs independence, it would be viewed as self-serving,” said Douglas Elmendorf, a former director of the Congressional Budget Office who teaches at Harvard.

While some corporate leaders have criticized the president’s attacks on the Fed in private, they have stayed largely silent in public. Instead of enforcing discipline as expected, financial markets have set record after record.

The silence is perhaps most notable when it comes to Congress, which nearly a century ago enshrined the Fed’s independence in statute and said the president was limited in removing its officials. Republicans on the Senate Banking Committee, which oversees the Fed, have been wary about speaking out publicly against Mr. Trump’s actions against the central bank.

In a break with his colleagues, Senator Thom Tillis, Republican of North Carolina, said that he would not consider a replacement for Ms. Cook until the legality of her removal was resolved. Mr. Tillis is not seeking re-election.

“The real question is why the majority of Congress isn’t stepping up, because Congress has traditionally been very jealous about their oversight of the Fed and protecting it from overreach by the executive branch,” said Lael Brainard, who served as vice chair at the Fed before joining the Biden administration.

Scott Alvarez, the Fed’s former general counsel, said the central bank was right to steer clear of Ms. Cook’s legal battle and defer to the court on any ruling given the backdrop.

“There’s a big risk that they get themselves on the wrong side of the Department of Justice and that would lead the president to take some adverse action,” he said.