The independence of the US Federal Reserve: Why it is crucial to the US economy and the global economy?

The independence of the US Federal Reserve: Why it is crucial to the US economy and the global economy?

With the recent controversy of Trump firing Lisa Cook, a governor under the Federal Reserve’s chair, Jerome Powell[1], this event has imposed a risk to the independence of the US Fed[2]. With a direct inference to the US Fed by Trump, the institutional principle of the US Fed being independent from the US government as an executive body is being infringed[3].

Only one of thousands instance of Trump firing governors and workers in the US Federal Reserve[4], hesitation and uncertainty among the public and other governmental bodies arises, how may such intervention on the US Fed affects the US economy and the global economy?

Impact on the US Economy

As an independent body from the US government, The US Federal Reserve acts a body to a few policies including setting the stances of US monetary policy, maintaining credibility and market confidence, promoting long-term economic growth, etc.[5] The recent direct executive interference towards the US Federal Reserve may lead to a few of the following issues to the US economy.

Inflation problems

The US undergone an inflationary period ahead of the 1972 elections when US president Nixon pressured Arthur Burns (chairman of the US Federal Reserve from 1970 to 1978) for a loosened monetary policy, showing a most recent experience of the Fed bowing to political pressure will lead to high inflations[6]. Similarly, unintended consequences may occur again from what we have seen from the previous political intervention on the US Fed.

Lower market confidence and credibility

The interference from the US government would lead to a corrosion of confidence in US assets and bonds if the US Fed can be easily intervened by the executive body, i.e. the US government, this is because of the decreased reliability and safety for investors, and unpredictability of policies[7]. With such impact, the public will generally have lower confidence towards US assets and markets, leading to higher market volatility and higher long-term interest rates.[8]

Upend the Fed’s practice of implementing monetary policy free from political pressure

The firing of Lisa Cook, as a board member of the US Federal Reserve will give a chilling effect to other federal governors and workers. This is because overt political pressure on independent agencies can affect behaviour of their agents[9]. As the Fed being one of a few “independent agencies” in the US, the branch was supposed to operate insulated from the US government[10], which political pressure from Trump in recent events have raised immense stress to the Fed and how they should act to avoid being fired.

Impact on the global economy

The US Federal Reserve, de facto, is one of the most crucial actors in governing the international financial system[11], not only is the US Dollar being a safe haven currency in the global currency market[12], but the Fed also acts as the lender of last resort under several critical global situations, including the 2008 Financial Crisis and COVID-19 Pandemic.[13]

Weakening of the US Dollar

With Trump pressurising the Federal Reserve by firing Lisa Cook, with speculation due to the governor’s opposition to rate cuts, which went against Trump’s interest and plannings[14]. The rate cut has weakened the US Dollar, supported by the US Dollar Index falling by over 10% in 2025 to 97.36[15].

Global economy instability

With the US Federal Reserve losing independence and more susceptible to political pressure from the executive branch (US government) and Trump, it is likely to cause some degree of global economy instability as the dependence on the executive body may lead to an unpredictable and inconsistent monetary policy. This inconsistency can cause fluctuations in global financial markets, disrupt international trade and investment, and reduce the effectiveness of coordinated global economic responses to crises.[16]

Conclusion

The recent firing of Lisa Cook by Trump symbolizes a significant threat to the independence of the US Federal Reserve, an institution designed to operate free from political interference. The consequences of such actions extend beyond the US borders, potentially destabilizing both domestic economic stability and international financial systems. Safeguarding the Fed’s independence remains critical to maintaining market confidence, controlling inflation, and ensuring the steady functioning of the global economy. Without this autonomy, the risks of higher inflation, lower market confidence, and increased global financial volatility become more pronounced, underscoring the urgency for protecting the institutional integrity of the US Federal Reserve. imbalance US economy.

[1] Leggett, T. (2025). US Fed loss of independence a serious danger, says Lagarde. BBC. [online] 1 Sep. Available at: https://www.bbc.com/news/articles/c5y3110edzgo# [Accessed 8 Sep. 2025].

[2] Levin, B. (2025). What’s Going On With the Lisa Cook–Donald Trump–Federal Reserve Drama? [online] Vanity Fair. Available at: https://www.vanityfair.com/news/story/lisa-cook-donald-trump-federal-reserve-drama [Accessed 8 Sep. 2025].

[3] Wessel, D. (2025). Why is the Federal Reserve independent, and what does that mean in practice? [online] Brookings. Available at: https://www.brookings.edu/articles/why-is-the-federal-reserve-independent-and-what-does-that-mean-in-practice/ [Accessed 8 Sep. 2025].

[4] Choi, A., Gainor, D. and Carroll, K. (2025). Tracking Trump’s overhaul of the federal workforce. [online] CNN. Available at: https://edition.cnn.com/politics/tracking-federal-workforce-firings-dg [Accessed 8 Sep. 2025].

[5] Federal Reserve (2025). Federal Reserve Board - The Fed Explained. [online] www.federalreserve.gov. Available at: https://www.federalreserve.gov/aboutthefed/the-fed-explained.htm [Accessed 8 Sep. 2025].

[6] Wessel, D. (2025). Why is the Federal Reserve independent, and what does that mean in practice? [online] Brookings. Available at: https://www.brookings.edu/articles/why-is-the-federal-reserve-independent-and-what-does-that-mean-in-practice/ [Accessed 8 Sep. 2025].

[7] Hansen, S. (2025). Why the Fed’s Independence Matters to Markets, the Economy, and Your Wallet. [online] Morningstar, Inc. Available at: https://www.morningstar.com/markets/why-feds-independence-matters-markets-economy-your-wallet [Accessed 8 Sep. 2025].

[8] Bai, S., Jung, J. and Li, S. (2024). The Spillover Effects of Market Sentiments on Global Stock Market Volatility: A Multi-Country GJR-GARCH-MIDAS Approach. Journal of risk and financial management, [online] 17(12), pp.569–569. doi:https://doi.org/10.3390/jrfm17120569

[9] Devins, N. and Lewis, D.E. (2023). The Independent Agency Myth. [online] William & Mary Law School Scholarship Repository. Available at: https://scholarship.law.wm.edu/facpubs/2147/ [Accessed 8 Sep. 2025].

[10] Wofford, C. (2025). How Trump’s dismissal of a Fed governor could redefine presidential power – if courts agree that he alone can interpret vague laws. The Conversation. [online] Available at: https://theconversation.com/how-trumps-dismissal-of-a-fed-governor-could-redefine-presidential-power-if-courts-agree-that-he-alone-can-interpret-vague-laws-264566 [Accessed 8 Sep. 2025].

[11] Bradlow, D. (2022). Three reasons why the US Federal Reserve Bank holds the world in its hands. [online] The Conversation. Available at: https://theconversation.com/three-reasons-why-the-us-federal-reserve-bank-holds-the-world-in-its-hands-190936 [Accessed 9 Sep. 2025].

[12] Iaccino, B. (2024). The Role of Safe Haven Currencies - OpenMarkets. [online] @Open_Markets. Available at: https://www.cmegroup.com/openmarkets/fx/2024/The-Role-of-Safe-Haven-Currencies.html# [Accessed 9 Sep. 2025].

[13] Bohorquez, D. (2023). The United States as the International Lender of Last Resort. [online] Available at: https://diegoboh.github.io/files/JMP-DB.pdf [Accessed 9 Sep. 2025].

[14] Gonultas, B. and Yildirim, E. (2025). Gold hits new record amid Fed’s rate cut expectations, weakening US dollar. [online] Anadolu Ajansı. Available at: https://www.aa.com.tr/en/economy/gold-hits-new-record-amid-fed-s-rate-cut-expectations-weakening-us-dollar/3682321 [Accessed 9 Sep. 2025].

[15] Morgan Stanley. (2025). Watching the Dollar in 2025 | Morgan Stanley. [online] Available at: https://www.morganstanley.com/insights/articles/us-dollar-declines [Accessed 9 Sep. 2025].

[16] Leggett, T. (2025). US Fed loss of independence a serious danger, says Lagarde. BBC. [online] 1 Sep. Available at: https://www.bbc.com/news/articles/c5y3110edzgo# [Accessed 8 Sep. 2025].