The Fed storm: Bumpy road ahead for central bankers

US President Donald Trump’s ongoing public pressure on the Federal Reserve marks a striking challenge to central bank independence in a developed economy, a necessary safeguard to set interest rates based on the economy’s needs.In the US, the Fed’s independence has largely been respected by lawmakers in the modern era.But for months, Trump has repeatedly criticised Fed Chair Jerome Powell for keeping interest rates steady. Trump, who wants rates cut, has vowed to replace Powell - whose term as chair ends in 2026 - with someone more compliant.Late on Monday, Trump moved to oust Fed Governor Lisa Cook following allegations that she falsified mortgage documents, a dramatic escalation in the president’s battle for more control over the US central bank that unnerved investors.The Fed’s independence traces its roots to the Treasury-Fed Accord of 1951, which separated monetary policy, the management of money supply, from fiscal policy, government decisions about taxation and spending. That ended a period in which the central bank was pressured by the US Treasury to keep interest rates artificially low.The Fed sets interest rates without needing approval from the president or Congress. While it is accountable to lawmakers and its leadership is appointed by the president and confirmed by the Senate, the long, staggered terms of the Board of Governors and the chair help insulate the Fed from short-term political pressures.While presidents over the years have privately expressed frustration to the Fed leadership over the level of interest rates, they generally have refrained from publicly criticising the central bank.In the decades since the Fed gained independence, other central banks around the world have gained similar autonomy in setting rates free of political interference.The most common argument for independence is that it allows monetary policy experts to make decisions that prioritise long-term economic stability over short-term political gains.But following the 2008 financial crisis, critics accused central banks of having failed to anticipate the collapse of the housing bubble.Central banks again became a lightning rod for criticism after the inflation crisis triggered by the Covid-19 pandemic forced them to escalate interest rates in 2022.Critics accused them of missing the initial inflation buildup and then being too slow to respond as living costs soared.More recently, as economic growth has slowed, central bankers have come under political pressure to bring rates down.The end result has been renewed scrutiny of the judgment of officials, their accountability to executive and legislative branches of governments, and the transparency of their decision-making processes.Investors value the Fed’s status as an independent organisation. Without it, the central bank’s pledge to keep inflation in check lacks credibility.In the US, the Supreme Court has shielded Fed officials from being directly removed by the president without cause, which has quieted Trump’s threats to fire Powell.Yet the president is able to put his stamp on the central bank by nominating new people to vacancies.The Federal Reserve’s annual gathering in Jackson Hole last week also highlighted the political pressures weighing on the Fed.Global central bankers gathered at the US mountain resort over the weekend were starting to fear that the political storm surrounding the Fed may engulf them too.If the world’s most powerful central bank were to yield to that pressure, or Trump finds a playbook for removing its members, a dangerous precedent would be set from Europe to Japan, where established norms for the independence of monetary policy may then come under new attack from local politicians.A scenario in which the Fed sees its ability to counter inflation is jeopardised by a loss of independence could be taken as a direct threat to their own standing and to economic stability more broadly.