Recent attempts by members of the executive to influence rate decisions pose a threat to the institutional safeguards around monetary policy

The autonomy of the Federal Reserve and other central banks has long been considered a pillar of modern macroeconomic policy. The prevailing wisdom states that the insulation of the rate-setting process from short-term political considerations is a necessary precondition for the prevention of rampant inflation. This doctrine is being tested in 2025 and 2026 for the first time in decades.

Political Business Cycles – A Tale of Two Inflation Waves

There is a clear political incentive for elected representatives to create an artificial boom ahead of elections, through stimulating employment, asset prices, and short-term growth in order to manufacture an economic 'feel-good' factor

When the independence of the central bank is compromised, these pressures often result in a permanent increase in the general price level with no accompanying growth in output. Empirical analyses of central bank independence in emerging markets and advanced economies confirm that the reduction of institutional insulation tends to result in persistently higher inflation rates without commensurate increases in productivity. Additionally, the credibility of the central bank may be undermined if the population suspects that political actors hold a disproportionate influence over the decision-making process. Inflation expectations may spiral out of control, exacerbating the situation, as demonstrated by Turkey in the early 2020s

A Test of Institutional Resilience in 2026

The President and the members of the cabinet have launched a full-scale assault on the independence of the Federal Reserve in early 2026. Dissatisfied with the pro-inflationary bias of the central bank, the President and his allies initiated several procedural innovations aimed at accelerating the removal of the current Governor and limiting the span of influence of his successor. These efforts have so far failed due to the combination of the following protective mechanisms:

  • A staggered appointment schedule that prevents either wing of the legislature from removing the Governor at a politically convenient time due to his 14-year tenure in office
  • A distributed decision-making process that involves five presidential appointments out of eleven voting members who serve at the pleasure of independently-elected regional

Federal Reserve Bank presidents

  • Statutory restrictions on the removal of the Governor, who can only be dismissed by a two-thirds vote in the legislature The structural reforms of the central bank, which took place under the supervision of Congress, have proven to be largely effective at preventing overt politicization of the rate-setting process. Yet, the very fact that the President and his allies have felt the need to intervene creates a negative externality for the economy. The increased perception of risk weighs on the value of government bonds sold on the domestic exchange, resulting in higher yields and increased borrowing costs for the federal government.

Works Cited

Peterson Institute for International Economics (PIIE). (2025). Briefing 25-3: Central Bank Independence in Practice.

Porter, Eduardo. (2026). The Federal Reserve's independence is hanging by a thread. The Guardian.

University of Michigan, Dept of Economics. (2026). Can the Federal Reserve Remain Independent? Institutional Safeguards in a Politicized Era.