The Global Risks That Come With the Loss of an Independent Fed

It isn't just the U.S. Other countries have also come to expect an independent U.S. central bank

- David Uberti & Justin Lahart

President Trump's threat to attempt to fire Federal Reserve Chair Jerome Powell has raised a pressing but potentially unanswerable question: What would the global economy and financial markets look like without an independent U.S. central bank?

Shielded from White House interference, the independent Fed has increasingly served as an anchor for U.S. and global markets, stepping in to steady the ship during the 2008-09 financial crisis, the Covid pandemic and other shocks of recent years. Economists credit the central bank's ability to help keep things stable in large part to its power to make moves it deems necessary, regardless of politics.

Now, former Fed officials and investors warn that a central bank more beholden to the White House could lose its ability to act quickly and credibly in the face of financial threats. On Tuesday, Trump suggested in a White House meeting with Republican lawmakers that he could soon try to oust Powell, escalating months' worth of criticism that the central bank has kept interest rates too high for too long. The president later said it was highly unlikely that he would fire Powell.

"Politicians almost always think interest rates should be lower than they are," said Alan Blinder, a Princeton University economist and former Fed vice chair. "This is the major reason we need an independent central bank."

The possibility that the firewall could crumble holds the potential to reverberate across markets at an unpredictable moment for the economy. The U.S. is still shaking off years of inflation above the Fed's longstanding 2% target, with recent data showing that price pressures from Trump's trade wars are beginning to mount. Central bankers and investors the world over are waiting on the Fed's next move.