A Tale of Conflicts and Independence
Throughout its history, the Fed has repeatedly asserted its independence by resisting political pushes aimed at favoring the election cycle or short-term goals. Notable examples include that of Richard Nixon, in 1972, who lobbied Arthur Burns for pre-election expansionary policies; that of Jimmy Carter, whose staff opposed Paul Volcker’s harsh anti-inflation tightening in 1979; Ronald Reagan’s pushes to cut rates once inflation was tamed. Even during Joe Biden’s presidential term, several voices inside and outside the administration pushed for a more accommodative approach, but Powell emphasized that the institution acts “only on data,” not on political pressure.
In more recent times, U.S. President Donald Trump has publicly criticized Jerome Powell for not cutting rates, threatening to remove him from office, but despite this, the Fed has stood its ground. The Fed’s history is littered with moments when the central bank has countered political expectations, choosing to follow its mandate of price stability and maximum employment rather than the sirens of electoral opportunity. From the Nixon Tapes to Trump to Biden’s formal assurances that he would leave Powell “the space and independence” to achieve his anti-inflation goals, the Fed has repeatedly demonstrated that its independence from the White House is the key pillar for the credibility of monetary policy in the United States.
The Nixon - Burns Case
In 1972, Richard Nixon used the “Nixon Tapes,” secret recordings of the U.S. president’s conversations in the Oval Office, to urge Chair Arthur Burns to keep interest rates low by asking for an “independent way” to follow his directions, despite rising inflation. Burns, though under intense pressure, maintained a partially accommodative approach, avoiding excessive maneuvers that would have aggravated inflation in the long run, showing “serious reluctance” documented in the minutes of the FOMC: the Federal Reserve Board responsible for U.S. monetary policy.
The Reagan - Volcker Case
After taming inflation, Reagan and his Treasury Secretary James Baker, attempted to push Volcker to cut rates more quickly to support the recovery, even going so far as to select FOMC members favorable to more expansionary policies. Volcker threatened to resign if he was forced into selloffs that could undermine price stability, forcing opponents to back down, confirming the principle that the Fed does not operate under political dictation.
The Trump - Powell Case I
During his first term, Donald Trump openly criticized Jerome Powell for his decision not to cut rates: calling him “my biggest threat.” With the principle of “data dependent,” Powell has repeatedly reiterated that the FOMC acts “driven by economic data, not political pressures,” holding rates steady, raising them later to contain inflation.
The Fed mandate explained
At the heart of this tension is the Federal Reserve’s so-called “dual mandate”: to achieve price stability, with inflation at 2 percent, while promoting sustainable employment-goals that sometimes require unpopular actions for political leaders eager to quickly stimulate the economy.
Historically, the Fed’s independence has proven crucial in anchoring inflation expectations and maintaining credibility in global markets, in fact, when central banks succumb to political pressures, investors begin to doubt their determination to ensure price stability, with the risk of a rise in long-term interest rates with numerous turbulences in financial markets. The Federal Reserve’s founding law further protects the chairman and board members, who can be removed only “for cause.”
The Conflict in 2025
A president may see lower interest rates as a useful tool to stimulate economic growth by supporting stock markets: Trump’s calls for a rate cut respond to precisely this economic rationale, but risk undermining the Fed’s credibility by pushing it toward policies that could exacerbate an already buoyant inflation, fueled in part by the very trade tariffs introduced by his own administration.
Indeed, tariffs, particularly those applied to imports from China, have increased costs in the U.S. economy, complicating the Fed’s task in containing price increases while avoiding stifling growth. One of the cornerstones of Trump’s economic strategy is precisely financial and stock market growth, which is used as a symbol of the country’s economic success and as a means of strengthening the soundness of public finances, generating higher tax revenues and consolidating political consensus.
The divergence between the Fed and the White House reflects deeper differences in objectives: while a president may prioritize financial market growth and the perception of a strong economy, the central bank must weigh these benefits against the risk of triggering an inflationary spiral.
Markets and Economy: an irreconcilable balance?
Financial markets react immediately to signs of possible political interference in monetary policy. News alone regarding a possible removal of Powell from office shook the Treasury market by driving up the forward premium as investors began to price in an environment of greater uncertainty regarding central bank independence.
Should the Federal Reserve react as expected from an independent and responsible central bank, in the current environment marked by inflation that remains above target and growing risks related to expansionary fiscal policies and possible trade tariffs, the most consistent choice would be to keep rates at restrictive levels or, even, hint at the possibility of further hikes should inflation remain elevated. The Fed’s priority remains price control while maintaining credibility, even at the cost of temporarily slowing economic growth or putting pressure on financial markets.
The latest data on U.S. inflation confirm a gradual slowdown, but still not enough for the Fed to declare “mission accomplished” on the price stability front. The Consumer Price Index (CPI) on an annual basis rose 2.4 percent in April, slowing from the 2.8 percent recorded in February, confirming an easing of inflationary pressures while remaining above the central bank’s 2 percent target. On a monthly basis, the CPI contracted slightly by 0.1 percent, reversing the 0.2 percent growth noted in the previous month-a sign that short-term inflation is fading faster than in past months. If the Fed chooses this line, the first impact would be seen in the Treasury market: short-term bond yields would rise immediately, reflecting the adjustment of expectations on official rates, while long-term yields could show a more muted reaction, signaling that investors trust the Fed to contain inflation in the medium to long term.
The core figure, i.e., the index stripped of the more volatile components such as food and energy, also showed a similar dynamic: on an annual basis the core CPI rose 2.8 percent in March, slowing from February’s 3.1 percent, while on a monthly basis the change stopped at +0.1 percent, down from +0.2 percent previously. These numbers, while confirming a retreating inflation, keep the attention threshold high for the Federal Reserve, which will be faced with a well-known dilemma at its next meeting on May 13: let down its guard or reiterate a cautious stance so as not to jeopardize the progress made on the price front.
Equities would probably react with a phase of weakness, especially in the more rate-sensitive sectors such as technology and real estate: typically, a high cost of money reduces the valuation of future earnings by making credit more expensive. Analysts explain that, however, in the medium term, a Fed determined to bring inflation back under control could also restore a more predictable environment for investors, encouraging a rebound once price expectations stabilize.
An uncertain Outlook
Meanwhile, as we await new macroeconomic developments, traders are already looking further ahead, focusing on the May CPI estimates. Forecasts point to a further decline in inflation toward 3.4 percent year-on-year with core around 3.5 percent, levels that, if confirmed, could allow the Fed to adopt less restrictive tones, although they are unlikely to be enough to justify a real pivot in the short term.
On the currency front, a Fed that is firm or still aggressive in fighting inflation would make the dollar stronger due to the rate differential against other major currencies, attracting capital flows to U.S. assets, especially in higher risk environments in Europe or Asia.
With regard to commodities, the answer will depend on the combination of dollar strength and global demand: a stronger dollar reduces the prices of commodities expressed in U.S. currency, while a tight monetary policy tends to slow growth resulting in reduced demand for energy and industrial commodities. In early 2025 we see the dollar showing some volatility, influenced by political tensions and Fed decisions. This uncertainty has pushed many investors into gold. After reaching a record high of $3,500 an ounce, the price in late April 2025 fell to around $3,300, following Trump’s decision to withdraw his threat to fire the Fed Chairman and optimism about a possible trade agreement with China.
In recent years, several academic studies, such as those conducted by the Peterson Institute for International Economics, have shown that in cases of trade escalation between the U.S. and China, central banks have often taken a cautious approach, avoiding aggressive hikes so as not to amplify the damage on the real economy already hit by uncertainty and higher costs for businesses. Looking beyond the United States, similar experiences can be observed in Canada and Mexico: after the introduction of U.S. tariffs on steel and aluminum at the end of February 2025, their respective central banks are showing caution in reacting to inflationary effects, knowing that the external origin of such pressures does not justify a more restrictive monetary policy. There are, however, some cases where the reaction was diametrically opposed. One example is the Chinese Central Bank in 2018: instead of raising rates to defend the currency or counter imported inflation, it chose to cut reserve requirements to stimulate the domestic economy and offset the recessionary effects of U.S. tariffs. Thus, it is evident that central banks follow differential patterns depending on the macroeconomic environment, the nature of inflation, and business cycle conditions, making the combination of trade policy and interest rates one of the most complex and relevant issues for global market stability.
In the current context of the U.S. economy, characterized by a public debt that has reached record levels, the issue of the strength of the dollar and its impact on bond markets is one of the least stated but most strategic priorities for Donald Trump’s second term: the depreciation of the dollar is a key lever to ease the growing pressure on interest expense on federal debt, in a context where Treasury yields have shown signs of strain precisely because of the huge amount of bonds that the U.S. Treasury must constantly place on the market. Indeed, a weaker dollar would make it less attractive for foreign investors to hold U.S. bonds, but at the same time, it would artificially reduce the real value of the debt and ease the nominal burden of interest in the long run, while inflation, if well managed, would help further erode the real value of the debt accumulated over the last few expansive cycles of government spending. Not surprisingly, Trump’s trade policies, starting with tariffs, can also be read as an attempt to rewrite the fiscal balance of the U.S. At a time when the federal deficit has reached historically unsustainable levels, tariffs on imports are not only a protective measure for U.S. industry but in fact an indirect form of taxation, capable of generating tax flows without having to go through Congress to pass new taxes, a mechanism that allows the administration to take in additional revenue quickly, partially helping to cover debt financing needs, even if the cost of this strategy is paid by consumers in the form of higher prices
In Trump’s vision, however, this dynamic can be seen as an acceptable form of redistribution, as long as the dollar is allowed to fall enough to push U.S. export competitiveness and thus fuel enough nominal growth to offset the negative effects of tariff barriers. The mix of the weak dollar, tariffs and pressure on interest rates then becomes a political and economic shell game, in which the administration seeks to gain fiscal room for maneuver without having to resort to painful budget tightening or cuts in government spending: the more the dollar falls, the more the accumulated debt can be repaid with devalued currency, while monetary policy is pushed to the sidelines, forced to move in a difficult balance between inflation, employment and financial stability. In this scenario, the credibility of the Federal Reserve and the autonomy of its choices become crucial variables, because only a central bank willing to keep rates relatively low and not overly counter currency depreciation can facilitate a framework in which the federal government manages to survive the burden of a debt now out of proportion to GDP. Trump’s strategy in this regard already appears clear in his statements and in his economic policy, with the goal of building a financial dynamic conducive to the continued refinancing of the national debt by exploiting the tools of trade and currency policy as an extension of fiscal maneuvers.
Conclusions
History shows that only a Federal Reserve free of political conditioning can effectively pursue the dual mandate of price stability with full employment. Recurring tensions between the White House and Fed, from Nixon to Trump, reiterate that yielding to electoral pressures risks undermining the fight against inflation and market confidence. In a context of high debt, tariffs and dollar volatility, central bank independence remains the most asset to ensure data-driven decisions and preserve the credibility of the U.S. economy in the world.
