Political Pressure and Central Bank Independence: The Case of the U.S. Federal Reserve
- William Renner
- 3 days ago
- 4 min read
At a time of increasing economic uncertainty, the United States Federal Reserve finds itself balancing employment, inflation, and expectations from the Oval Office. The September rate cut was more than just a routine monetary policy adjustment; it symbolized a greater shift in the political landscape of the Federal Reserve. With increased pressure from the White House to achieve short-term political goals with monetary policy, concerns are being raised about Fed independence and long-term economic stability.
The Rate Cut: Policy and Market Reactions
On Wednesday, September 17, the Federal Reserve cut interest rates for the first time this year by 25 basis points, to a target range of 4%–4.25% (Reuters, 2025). It also indicated plans to continue lowering borrowing costs over the remainder of the year, though Federal Open Market Committee (FOMC) members remain divided over how much rates should fall. These cuts came at a complicated time for the U.S. economy, with rising inflation and slowing job growth hinting at potential stagflation risks. Markets reacted cautiously to the announcement. Of the three major indexes, the S&P 500 and Nasdaq both fell, while the Dow posted a small gain. Analysts suggest that the muted response reflects that investors had already anticipated the cut, meaning the decision was largely priced in ahead of time (The New York Times, 2025). Treasury 10-year yields rose signaling a mild bond selloff in response to heightened political instability and questions over Fed independence (Reuters, 2025).
Introducing Stephen Miran
The rate cut followed heightened public tension between Federal Reserve Chair Jerome Powell and President Donald Trump. In April 2025, President Trump publicly threatened to fire Powell due to disagreements over interest rate policy, though legal experts debated whether a president could legally remove a Fed chair without proper cause (State Street Global Advisors, 2025). Adding to the uncertainty was the appointment of Stephen Miran, the newest member of the Fed’s Board of Governors. Miran, who had previously served on the White House Council of Economic Advisers, was sworn into the FOMC just a day before the rate decision. During the vote, Miran voted for deeper rate cuts, stating that he did not see significant tariff-related inflation and believed Republican fiscal policy was generating “downward inflationary pressures.” In the Fed’s dot plot projections, Miran identified himself as the outlier, calling for rates as low as 2.75%–3% by 2025; a full 1.25% lower than prevailing levels at the time (Investopedia, 2025).
Source: https://www.reuters.com/world/us/mirans-fed-dissent-makes-splash-fails-sway-outcome-2025-09-17/
Independence at Risk
Since its creation in 1913, the Federal Reserve has been designed to operate independently from the White House. Congress defines the Fed’s mandate, but monetary policy decisions are left to the central bank itself. Since 1977, its dual mandate has been to maintain stable prices (low inflation) and maximize employment (Brookings Institution, 2025). A high degree of independence allows the Fed to pursue long-term economic stability, protecting policy from being influenced by short-term political agendas (Michigan State University Research, 2022). However, recent events, such as public pressure on Powell, attempts to fire Fed Governors, and the appointment of former members of the Trump administration to the FOMC, have raised questions about whether this independence is being challenged.
Market Impact
Consumers: Lower interest rates could benefit American consumers in the short-run. In the near-term, the result of lower borrowing costs for mortgages, auto loans, and lines of credit may stimulate consumer spending (Bank of Canada, 2025). However, excessive rate cuts in the future may lead to heightened inflation, eroding consumer purchasing power in the medium to long-term (Gonzaga University, 2025).
Bond Markets: In normal times, lowering interest rates drive bond prices higher, as newly issued bonds now offer lower returns than before. That said, the September rate cut created an unusual phenomenon, seeing a mild bond selloff (Reuters, 2025). Heightened political volatility and a decline in investor trust in U.S. credibility overpowered the usual increase in bond demand that follows a decrease in interest rates. Investors are beginning to look for other safe haven assets as questions begin to arise around long term stability of the United States.
Equity Markets: Markets stand to climb in the medium term from the increase in corporate profits resulting from access to cheaper capital. However, in the longer term, markets value political stability, and if the Federal Reserve is seen as losing its independence, this could negatively impact valuations of U.S. companies (J.P. Morgan, 2025).
Commodity Markets: Investors often turn to alternative assets when market volatility spikes. Gold and silver have already seen an impressive rally as of 2025, with both rising over 60% YTD (Yahoo Finance, 2025). Increased economic and political instability in the U.S. could see these assets rise to new heights.
The September rate cut was more than just a shift in monetary policy. It was a reminder of how crucial it is for a country to have its Central Bank independent from its political landscape in order to ensure long-term economic growth. If monetary policy in the U.S. comes to be seen as a political tool rather than an economic safeguard, the cost will serve to weaken credibility in the U.S. financial system, and the ripple effects will be felt globally .
