Is the US Central Bank Losing Its Independence? – by Ramsey Crookall

After a summer of headlines, one theme has moved from the policy pages to the market screens: growing political pressure on the US Federal Reserve. Investors are asking what this could mean for interest rates, the US dollar, and asset prices more broadly. To answer this question, it helps to understand what is happening, why it matters, and how to think about portfolios.

What is new?

Donald Trump’s daily bashing of the U.S. central bank this year has left little doubt that he intends to exert greater political influence over the Fed than any president since the 1970s. That includes attempts to replace a sitting governor to accelerate appointments that align with the administration’s policy preferences, and public calls for steep rate cuts, potentially toward 1%, paired with tolerance for a weaker dollar. Markets have noticed. By late September, the dollar index was down roughly 9% year‑to‑date, and the US yield curve had steepened as traders priced near-term cuts but higher long-term inflation risk.

There’s also institutional pushback. A bipartisan group of former Fed chairs, Treasury secretaries and senior White House economists has urged the Supreme Court to reject a bid to fire a Fed governor, arguing that undermining the central bank’s independence would risk higher inflation and a weaker economy. That rare coalition underscores how unusual and consequential this moment is.

Why central‑bank independence matters

Independence is not absolute. Central banks coordinate with governments in crises, but history shows that overt politicisation tends to end badly. When leaders pressure central banks to keep rates too low or to finance fiscal programs, credibility erodes. The usual symptoms follow: currency weakness, higher risk premia, and more volatile inflation that ultimately raises borrowing costs. Examples span Turkey (revolving central‑bank leadership and rate cuts despite rising inflation), Argentina (money financing and recurring crises), India (governor resignation amid pressure in 2018), Japan (long‑running policy alignment that helped weaken the yen but left heavy debt burdens), and even the United States in the early 1970s, when political pressure contributed to an overly loose stance and the long inflation fight that followed.

Forward‑looking research points the same way. Work from the Peterson Institute for International Economics (PIIE) models a scenario in which the Fed is pushed to run the economy materially above potential. The problem is that short-lived, politically motivated moves may be detrimental to the long-term economic well-being of a nation. They may, in other words, saddle the economy with problems further down the line. Over the next decade, growth slows relative to baseline, inflation runs persistently higher (settling around two percentage points above baseline), and by 2040 the US price level is far higher and cumulative real GDP materially lower than if independence had been preserved. The mechanism is familiar. As credibility falls, investors demand more compensation to hold US assets, capital flows shift, and inflation expectations become less anchored.

What it could mean for markets

US dollar: If the administration succeeds in pushing for easier policy and a cheaper currency, further dollar softness is possible. That typically supports non‑US equities and dollar‑priced commodities, while boosting US multinationals’ overseas earnings when translated back into dollars. The flip side is potentially firmer imported inflation.

Rates and bonds: A pattern of near‑term rate cuts but higher long‑term inflation risk can flatten then steepen the curve, with term premia rising. That mix argues for balanced duration (e.g. barbell or laddered approaches) rather than an all‑in bet at the long end.

Credit: Easier policy tends to support carry, but sustained questions about Fed independence can widen risk premia over time.

Emerging markets: A weaker dollar is usually a relief. However, if swap‑line politics become part of the toolkit, access to dollar backstops may vary by perceived alignment, adding a new layer of country‑specific risk.

How to think about portfolios

Diversify across regions and styles. A softer dollar can help non‑US and EM assets, but policy uncertainty argues against concentration in any single outcome.

Balance interest‑rate exposure. Near‑term cuts and longer‑term inflation risk can coexist pointing to the question of whether to avoid extreme duration altogether.

Manage currency risk deliberately. Where appropriate, think about whether to hedge foreign‑currency exposures or not given the dollar backdrop.

Keep some inflation resilience. Real assets (e.g., commodities) and companies with pricing power can help if inflation proves stickier than expected.

Conclusion

Markets can live with change, what they struggle with is uncertainty about the rules of the game. Clear institutional boundaries, credible inflation control, and predictable access to dollar liquidity are key to stable asset pricing. If Fed independence erodes, history and modelling suggest more inflation variability, a weaker dollar over time, and higher risk premia. Positioning with balance and diversification in mind remains the sensible course.

“This article is for informational purposes only and does not constitute financial advice. Should you invest, the value of your investment may rise or fall, and your capital is at risk. Investors should conduct their research or consult with an investment adviser before making any investment decisions”.