Global Central Bankers Unite to Defend Fed Independence Amid Political Pressure

The conflict between the U.S. presidency and the Federal Reserve has reached a dramatic new level. In a move widely interpreted as retaliation for Chair Jerome Powell's resistance to pressure to cut interest rates, the U.S. Justice Department has opened a criminal investigation into him. The probe, approved in November by a prosecutor aligned with President Trump, centers on whether Powell lied to Congress about the scope of the $2.5 billion renovation of the Fed's Washington headquarters. This is a remarkable escalation in a long-running pressure campaign, with the president having previously threatened to fire Powell and even named a potential successor.

The immediate market reaction was one of acute anxiety. When the news broke, it triggered a classic "Sell America" sell-off, reminiscent of the turbulence following last year's tariff announcements. Investors reacted with fear, driving U.S. Treasury yields to their highest levels since September 2025. The 10-year yield climbed above 4.2%, and the 30-year yield rose above 4.8%, directly signaling deep concerns about a less credible Fed and the potential for inflationary consequences. The U.S. dollar also weakened, falling to near its lowest levels in weeks against a basket of major currencies.

This global market jolt prompted an unprecedented show of solidarity. In a rare joint statement, the heads of 10 major central banks-including the European Central Bank and the Bank of England-declared full support for Powell. They called central bank independence a "cornerstone of price, financial and economic stability" and stated they stand in full solidarity with the Fed System. The message was clear: political pressure on America's central bank is seen as a threat to global economic stability. The notable exception was the Bank of Japan, which declined to comment on the statement.

The probe has now forced a stark choice. For markets, the fear is that a less independent Fed could lose its credibility in fighting inflation, making it harder to control price growth. For policymakers worldwide, the event underscores how the health of the U.S. economy and its institutions is inextricably linked to their own. The independence of the Fed is not just an American concern; it is a cornerstone of the global financial order.

The Core Conflict: Monetary Policy vs. Political Intimidation

The mechanism of pressure is now clear. Chair Jerome Powell has explicitly stated that the criminal investigation is a "pretext" and a direct intimidation tactic. He argues the real target is the Fed's independence to set policy based on economic data, not political preference. In a stark warning delivered in a video statement, Powell framed the threat as a choice: the Fed will continue to set rates based on evidence, or monetary policy will be directed by political pressure. This is the heart of the conflict.

The administration's actions have created a chilling precedent. The probe follows a pattern of threats to fire other Fed officials, most notably the attempted removal of Governor Lisa Cook. This escalates the stakes for the upcoming Supreme Court case on presidential removal power. The Court will hear arguments in the Cook case on January 21, a date that now carries immense symbolic weight. If the Court rules that the president can fire Fed governors at will, it would fundamentally undermine the central bank's autonomy. The administration's actions, including the probe, appear designed to test that very boundary.

The erosion of the non-partisan foundation is already visible. While the global central banking community has rallied around Powell, the domestic political response is more fractured. The probe has drawn sharp condemnation from former Fed chairs and bipartisan officials, who see it as a dangerous assault on a principle long accepted across the political spectrum. As one analysis notes, the administration's steps against the Fed may have "unintentionally demonstrated why [independence] matters." This is the core vulnerability: the very institution meant to be insulated from politics is now the subject of a political campaign, raising doubts about its future credibility.

Financial and Geopolitical Fallout: Scenarios for the Fed and Markets

The financial implications of a weakened Fed are profound and structural. A credible threat to its independence risks permanently degrading its most valuable asset: credibility. As Morningstar economist Grant Slade outlines, a worst-case scenario where political pressure forces the Fed to lower rates would "de-anchor long-term inflation expectations from the central bank's inflation target". This isn't just a theoretical risk. It would make controlling price growth significantly harder, leading to greater volatility in inflation and placing upward pressure on long-term Treasury yields as investors demand more compensation for uncertainty. The market's immediate flight to gold and the dollar's weakness are early symptoms of this loss of confidence.

The geopolitical fallout is equally significant. The U.S. dollar's status as the world's primary reserve currency is underpinned by the perceived strength and independence of the Fed. If that independence is compromised, it undermines the very foundation of dollar dominance. This creates a powerful incentive for the global financial system to seek alternatives, accelerating a potential fragmentation of the international monetary order. The coordinated defense by major central banks is not merely a show of solidarity; it is a direct investment in the stability of the system they all depend on. Their joint statement, calling independence a "cornerstone of price, financial and economic stability", frames the Fed's autonomy as a global public good.

This international chorus acts as a powerful deterrent. The administration now faces a stark choice: escalate a domestic political battle that risks triggering a coordinated international backlash and further market destabilization, or de-escalate to avoid a costly and unpredictable global crisis. The global central bank defense raises the political cost of continued pressure, forcing the administration to weigh the domestic political gains against the severe economic risks to the U.S. and the world.

The Supreme Court's upcoming hearing on January 21 is the critical catalyst that will determine the trajectory. The case of Governor Lisa Cook will test the constitutional boundary of presidential power over the Fed. A ruling that constrains the president's ability to fire governors would provide a vital institutional shield, bolstering the Fed's independence and offering a legal anchor for the global defense. Conversely, a ruling that grants broad removal power would validate the administration's intimidation tactics, likely triggering a deeper crisis of confidence in U.S. monetary policy. The Court's decision will not just settle a legal dispute; it will set the rules for the relationship between American politics and its central bank for decades to come.