Federal Reserve's Independence Under Fire as Political Pressures Mount

In recent times, the independence of the Federal Reserve has come under intense scrutiny, particularly due to the persistent pressure exerted by Trump. The dismissal of Federal Reserve Governor Lisa Cook and the unexpected dovish turn by Chairman Powell at the Jackson Hole symposium have further fueled concerns about the political influence on the Federal Reserve. Against this backdrop, a renowned geopolitical strategy research institution, Clocktower, has shared insights from a recent global report to help understand the political realignment the Federal Reserve is currently undergoing.

Clocktower argues that the Federal Reserve has never truly been independent in American history. The notion of "independence" is largely a product of a brief alignment between the central bank's anti-inflation stance and the neoliberal political consensus that emerged in the 1980s. As the dominant ideology in the United States shifts from neoliberalism to populism, the Federal Reserve's political realignment is almost inevitable.

The concept of the Federal Reserve's "independence" is inherently flawed because it is not explicitly defined in U.S. law. Historical evidence shows that the Federal Reserve's policies and actions have always been shaped, constrained, and sometimes directly controlled by political forces, including pressure from the executive branch, congressional authorization, and broader ideological trends.

Prior to 1980, the Federal Reserve was a product of political compromise and remained under government control. During its early years, the Federal Reserve primarily served as a financing tool for the Treasury Department rather than an independent monetary authority. During World War I, it provided low-interest loans to discount government bonds, financing the government's debt. During the Great Depression, President Roosevelt's emergency powers stripped the Federal Reserve of its gold standard constraints, allowing the Treasury Department to fully control the monetary base and freeze Federal Reserve assets. During World War II, the Federal Reserve explicitly committed to keeping interest rates low to reduce the Treasury Department's financing costs. Chairman Marriner Eccles even stated that the Federal Reserve was merely "executing the decisions of the Treasury Department."

The 1951 "Treasury-Federal Reserve Accord" is often seen as the starting point of modern Federal Reserve independence, ending wartime interest rate controls and allowing the Federal Reserve to focus on controlling inflation. However, this "independence" was largely nominal and quickly eroded under political pressure. In the 1960s, President Lyndon Johnson strongly urged Federal Reserve Chairman William Martin to maintain low interest rates to support the Vietnam War and the "Great Society" programs. In 1965, Johnson reportedly clashed with Martin over interest rate hikes at his Texas ranch. In 1967, they reached a compromise: the Federal Reserve eased policy in exchange for Johnson pushing Congress to pass tax increases.

President Nixon took this a step further in the 1970s, viewing the Federal Reserve as a political tool. He appointed Arthur Burns as chairman in 1970, expecting him to pursue an accommodative policy. During his first term, Nixon repeatedly pressured Burns through over a hundred private meetings, even leaving explicit instructions on the famous "Nixon tapes" to expand the money supply to aid his 1972 re-election. Subsequent presidents, Ford and Carter, continued to exert pressure on the Federal Reserve, albeit more subtly. Ford assured Congress that the money supply would grow, while Carter publicly criticized the Federal Reserve's anti-inflation stance during his campaign.

Beyond direct intervention from the executive branch, the Federal Reserve was also constrained by broader political and social environments. Arthur Burns' 1979 speech, "The Anguish of Central Banking," highlighted this limitation. He noted that the persistent inflation of the 1970s was not solely due to poor monetary management but to deeper political realities: American voters and elected representatives prioritized employment, growth, and welfare over price stability. Every attempt at tightening would immediately cause real pain for households and businesses, leading to resistance from Congress and the public, while the long-term benefits of controlling inflation were vague. Burns concluded that inflation persisted due to a "strong and widespread political preference" for expansionary policies, underscoring the political nature of monetary policy: without broad public support, a central bank's claims of "independence" are meaningless in controlling inflation.

From the 1980s to the 2010s, the rise of neoliberalism opened political space for a new definition of central bank independence. Frustrated by high inflation, voters shifted rightward, favoring small government, deregulation, and market-oriented reforms. Reagan's landslide victory in 1980 symbolized this shift, embedding fiscal conservatism and anti-inflation fervor into the core of U.S. economic governance. In this context, central bank "independence" was redefined as a safeguard against politically motivated money printing, with its primary task being price stability. Paul Volcker's appointment as chairman in 1979 (nominated by Carter and continued by Reagan) and his resolute interest rate hikes embodied this political shift.

However, this supposed "independence" was never truly detached from politics. It was essentially a political construct used to advance neoliberal priorities. By prioritizing low inflation (beneficial to creditors and capital holders) over full employment (traditionally a cornerstone of pro-labor policies), the Federal Reserve's "independence" became a mechanism to isolate the policy-making process from labor redistribution demands. Thus, central bank independence was not a return to "neutral technocratic governance" but a product of the 1980s social and political consensus.

Alan Greenspan's long tenure from 1987 to 2006 further solidified this model. His so-called "Great Moderation" period was characterized by stable growth and low inflation, shaping the Federal Reserve's image as a technocratic body unaffected by politics. However, beneath this facade, Greenspan's Federal Reserve actively promoted neoliberal financial deregulation, turning a blind eye to speculative bubbles, and creating a policy environment highly favorable to asset holders. The seeds of the 2008 financial crisis were sown during this "market-friendly independence" era.

Globally, this neoliberal version of central bank independence spread rapidly from the 1990s to the 2000s, promoted through IMF loan conditions, elite policy networks, and the "Washington Consensus." In international markets, "independence" became synonymous with "credibility," narrowly defined as a commitment to low inflation and fiscal discipline.

Post-2010, the global financial crisis (GFC) began to erode the neoliberal consensus that had dominated U.S. economic policy since the 1980s. As income inequality worsened, real wages stagnated, and the perception that "the government bailed out Wall Street but left ordinary people to foot the bill" deepened, U.S. voters in the 2010s increasingly turned to various populist ideologies. This political shift weakened societal acceptance of old orthodoxies—fiscal austerity, deregulation, and limited government role—and replaced them with stronger demands for policies directly supporting workers and residents. In this context, the Federal Reserve could not isolate itself from the changing political winds.

Janet Yellen's tenure as Federal Reserve Chair reflected this evolution. Her dovish stance could be explained by traditional macroeconomic logic—low inflation and fragile economic recovery—but the deeper social and political environment was also crucial. Yellen repeatedly emphasized the importance of a "strong labor market" and highlighted the impact of unemployment on individual lives, resonating with public skepticism toward "trickle-down economics" (the theory that wealth naturally trickles down from the rich to the rest of society).

During the pandemic, the Federal Reserve's actions further highlighted this shift. As inflation pressures built from late 2020 to 2021, the Federal Reserve was reluctant to tighten policy quickly, insisting that inflation was "transitory." This reflected political sensitivity: millions of families were still slowly recovering from the pandemic's impact, and premature tightening could be seen as callous or indifferent to the working class. In essence, the Federal Reserve's shift in priorities aligned more closely with the growing redistribution demands and pro-labor sentiments of the American public over the past decade. This was not a narrow partisan "leftward" shift but a response to societal opinion and political atmosphere.

During Trump's presidency, the erosion of the Federal Reserve's independence reflected the collapse of the neoliberal consensus and the rise of populism as the dominant political force. The Federal Reserve's ability to maintain "independence" has always depended on its political capital—the legitimacy it holds in the eyes of the public and elected officials. In the early 1980s, Volcker's anti-inflation policies succeeded because the American public had lost patience with runaway prices and was willing to support a painful economic rebalancing. In other words, independence could be sustained because it aligned with the preferences of the median voter from the 1980s to the early 2010s.

In contrast, by the 2010s and Trump's presidency, the Federal Reserve carried the stigma of being an "establishment elite institution"—an unelected technocratic organization that bailed out Wall Street during the financial crisis but left ordinary families to deal with foreclosures, stagnant wages, and widening wealth disparities. Both left-wing and right-wing populists questioned the Federal Reserve's legitimacy.

Under these conditions, especially with public support at historic lows, the Federal Reserve's political capital gradually eroded. An institution once protected by bipartisan consensus is now exposed to public hostility and presidential attacks, lacking the legitimacy base that protected it during the Volcker-Reagan era. In reality, the political environment forced the Federal Reserve to align with populist currents. Its policy orientation may increasingly reflect populist priorities: maintaining a loose monetary environment to support asset prices and tolerating higher inflation under the guise of a "strong labor market."

If anyone still believes the Federal Reserve can maintain independence in this environment, they may not have learned enough from the erosion of judicial independence during Trump's presidency. On March 14, 2025, Attorney General Pan Bondy delivered a highly controversial, electioneering speech at the Justice Department headquarters for Trump—an unprecedented public politicization of the Justice Department. This event marked the Justice Department's alignment with populism during the Trump era. If even the Justice Department, long seen as the most insulated part of the U.S. legal system, can be shaped by populist politics, then the Federal Reserve, with its structure more susceptible to administrative appointments, presidential pressure, and public opinion, is even less able to resist similar pressures.

Fairly, the Federal Reserve's political realignment is not due to weak leadership by Chairman Powell or a sudden ideological shift within the Federal Reserve. It is a product of structural political forces in the United States. When the preferences of the median voter change, the independent space for technocrats shrinks. In a political system dominated by populism, the Federal Reserve can no longer reasonably play the role of a "minority institution" that goes against the grain and prioritizes anti-inflation. Instead, it is intentionally or unintentionally participating in the populist agenda—prioritizing growth, employment, and short-term prosperity, even at the cost of long-term inflation risks. Therefore, the fate of the Federal Reserve's "independence" is not shaped by internal debates within the FOMC but by the broader social and political currents of the U.S. democratic system.