RECENT comments from US President Donald Trump criticising Federal Reserve Chairman Jerome Powell have reignited concerns over the independence of the world’s most influential central bank. Trump has publicly stated that Powell has been “too late and too slow” to cut interest rates, even suggesting he could be removed, an extraordinary claim that raises serious questions about the Fed’s ability to operate free from political influence.

The Role of the Fed in the Global Economy

The Federal Reserve’s decisions carry extraordinary weight not only because of the size of the US economy, but also due to the central role of the US dollar and the Treasury market in the global financial system. The Fed manages US monetary policy, sets benchmark interest rates, and oversees the stability of the financial system. Its actions influence everything from inflation and employment to capital flows and exchange rates.

With over US$26 trillion in outstanding debt, the US Treasury market is the largest and most liquid sovereign debt market in the world. It serves as the benchmark for pricing global financial instruments and a key reserve asset for foreign central banks. Moreover, the US dollar reportedly accounts for nearly 60 per cent of global foreign exchange reserves, cementing the Fed’s status as a central player in the international financial architecture.

Why Independence Matters

Central bank independence refers to the ability of a central bank to make decisions without direct political influence. This independence is crucial for several reasons:

1) Credibility and Market Confidence

When markets believe the Fed is acting objectively to maintain price stability and full employment, it reinforces credibility. Investors, both domestic and foreign, have confidence in the value of the dollar and the integrity of US monetary policy. If the Fed is seen as beholden to political interests, confidence could erode quickly, raising interest rates and increasing market volatility.

2) Inflation Control

Independent central banks are better positioned to resist political pressures that favour short-term stimulus, especially ahead of elections. History has shown that such pressures can lead to overheating and inflation, undermining economic stability. The Fed’s inflation targeting framework is designed to manage expectations and deliver stable prices over time, free from political timelines.

3) Safeguarding Reserve Currency Status

The supremacy of the US dollar as the world’s reserve currency is not guaranteed. It is built on a foundation of economic strength, institutional transparency, and policy consistency. Any perception of the Fed being politically manipulated could weaken that foundation, prompting global investors to diversify away from dollar-denominated assets, a shift that could have profound long-term consequences.

4) Support for Treasury Market Stability

A politically compromised Fed might be pressured to monetize debt or keep interest rates artificially low to accommodate fiscal agendas. Such actions could distort market pricing, discourage foreign participation in US Treasuries, and ultimately threaten the sustainability of US government financing.

Although US presidents have criticised the Fed before, public calls to fire a Fed chair are rare. The Federal Reserve Act allows for a four-year term for the chair, with removal only ‘for cause’ not for policy disagreements. Undermining this structure would set a troubling precedent, potentially paving the way for future administrations to manipulate monetary policy for short-term political gain. This would erode the institutional safeguards that have supported the US economy through decades of growth and crises.

In summary, the independence of the US Federal Reserve is not just a US issue; it’s a global imperative. The central bank’s decisions influence global interest rates, capital flows, and the safety of reserve assets. Preserving its independence is essential for maintaining investor trust, macroeconomic stability, and the dollar’s standing in the world.

As political rhetoric heats up, markets and policymakers alike should remain vigilant. Undermining the Fed may deliver short-term wins, but the long-term risks could be far more costly.

Eugene Stanley is Vice-President, Fixed Income & Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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