Fed Fightback Limits Dollar Losses

Above: U.S. Senator Thom Tillis of North Carolina. Image: Gage Skidmore.

Confidence grows the White House will struggle to capture the Fed.

The dollar pared losses Tuesday on signs President Donald Trump's White House would have to reconsider its attempts to bring the Federal Reserve into its orbit.

Republican Senator Thom Tillis, who sits on the powerful Senate banking committee, vowed to oppose any Fed nominees put before the chamber’s banking committee.

His stance follows the Department of Justice's decision to initiate legal proceedings against the Fed and its Chairman Jerome Powell over renovations to its Washington headquarters.

He accused administration officials of, "actively pushing to end the independence of the Federal Reserve."

News of legal action surprised investors and triggered a fall in dollar exchange rates at the start of the week. Signs of pushback against the White House would therefore be supportive of the currency.

In mid-2025, Trump opened up a new front in his attacks on the Fed by citing the costs of renovating the central bank's buildings. These latest legal proceedings form a new offensive in this line of attack.

But the Administration risks overstepping as Tillis' opposition shows. His comments are significant as he could block the administration from obtaining a floor vote until the legal cloud over Powell is resolved.

Above: The dollar claws back losses on hopes that Trump's efforts will be curbed.

He vowed to oppose the confirmation of any nominee for the Fed until the "legal matter is fully resolved".

His stance means the chance of getting White House adviser Kevin Hassett, seen as Trump’s frontrunner, to be nominated and confirmed as Fed chair has taken a hit.

Alaska Republican Senator Lisa Murkowski on Monday said Tillis is "right" to block any Fed nominees unless the probe is dropped.

"We need this like we need a hole in the head," says John Kennedy, a Louisiana senator who is also on the banking committee. "I know chairman Powell pretty well. I would be stunned if he had done anything wrong."

Trump has repeatedly accused the Fed of being too slow to lower interest rates and has been on manoeuvres to effectively 'capture' the central bank since taking office for a second term. The precedent of using the courts as a tool was set last year when legal action was taken against FOMC member Lisa Cook over alleged irregularities concerning a mortgage she took out.

Above: File image of Governor Cook, source: Federal Reserve.

Having absorbed criticism and attacks from Trump and the Administration during 2025, Powell now appears ready to go on the offensive this year.

In a forthright statement issued at the weekend, Powell explained that what's at stake is whether interest rates will be based on "political pressure or intimidation" instead of the U.S. economy's needs.

"The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President," he said.

Fed independence and credibility are central to America's privileged position in the global financial markets; it is a foundational bedrock of dollar value. Analysts warn the currency will stay under pressure during the coming year as the Administration indirectly influences Fed policy decisions.

A compromised Fed leaves the dollar at risk of absorbing structural risk premiums that would lower its value. This means a failure by the White House to exert influence over the Fed will be welcomed by markets and the dollar.

Above: Expectations for Federal Reserve's base rate as per money market pricing. It shows the Fed isn't expected to cut as deeply as was assumed back in October.

The White House's efforts could also be derailed were Powell to dig in and stay on the Fed board after May. After all, the Fed Chair has the option to do so once he steps down.

Trump wants lower interest rates as he makes dealing with the high cost of living a priority ahead of mid-term elections due November.

The administration says cheaper money will help make housing more affordable and has started 2026 with a series of moves to lower borrowing costs that include a $200BN programme of mortgage-bond purchases, and calling for a cap on credit-card rates.

However, after delivering three straight cuts in late 2025, the Fed has been signalling a pause to lowering rates further owing to still elevated inflation. This would frustrate Trump's political aims of lowering borrowing costs.