In the year ahead, with the Fed’s ability to skate independently already compromised, the question is whether the Fed will be allowed to manoeuvre when the game calls for it. — Reuters
AS candidates vie to become the next chair of the US Federal Reserve (Fed), they should heed the hockey legend Wayne Gretzky’s advice to “skate to where the puck is going, not where it has been”.
With many economic pucks in play – from sticky inflation, mounting deficits, and an artificial intelligence (AI) investment boom to potential financial fragility and concerns about the dollar’s global primacy – a big question for the global economy is whether the Fed will be allowed to do what it needs to do.
Will it maintain enough autonomy and credibility to promote stable prices, maximum employment, and financial stability when politics, increasing debt, and market exuberance could be heading the other way?
Congress designed the Fed to make expert judgments in the public interest, free from political influence and pressure.
But President Donald Trump’s second administration has something else in mind.
Some may say there is “no need to worry,” that the Supreme Court will protect Fed independence by finding a way to distinguish it from other agencies over which the president has asserted a right to remove “principal” officers at will.
Regardless of the outcome of litigation over the attempt to remove Fed governor Lisa Cook, though, the central bank’s independence already has been significantly impaired.
For example, Trump has asserted that all interpretations of law and review of agency expenditures, including by the Fed, fall within the purview of the White House and Justice Department.
The administration also has taken control of all Fed regulatory policy, including its oversight of bank capital and leverage.
The White House may claim that its control does not apply to the institution’s conduct of monetary policy, but this is a distinction without much difference.
Banks, by their very design, are in the business of creating and pricing money and credit. In a sense, they are to the Fed what franchisees are to McDonald’s.
Bank regulations – leverage ratios, capital requirements, reserve requirements – are all related to the availability of money and credit in the economy.
Key tools at the core of monetary policy – interest on reserves, the discount window primary credit rate and so forth – generally are produced through legal rules voted on by the Fed’s board.
How will the White House treat other tools, such as international swap lines, overnight reverse repo agreements, primary dealer arrangements, and the availability of master accounts?
Moreover, in an extraordinary turn, the chair of the White House Council of Economic Advisers, Stephen Miran, has been confirmed to the Fed board while merely on leave from the president’s team.
Trump and his senior aides already regularly call publicly for lower rates, and when the next chair takes office in May, a majority of the board will have been appointed by Trump.
At the same time, the Justice Department has taken the position that regional reserve bank presidents, who participate alongside the seven Fed governors on the Federal Open Market Committee, serve at the pleasure of the Fed board, and can therefore be removed at any time.
This erosion of the Fed’s autonomy is colliding with sticky inflation, higher import tariffs, and a worsening fiscal outlook. Annual inflation, as measured by core personal consumption expenditures (excluding food and energy), remained at 2.9% through August 2025, and Trump’s tariffs on goods – which increased the overall effective tariff rate this year from an average of 2.4% to 18% – have exerted additional upward pressure on prices.
Compounding matters, despite the administration’s cuts to the federal workforce, government spending was up 4% in fiscal year 2025, and the deficit was 5.9% of gross domestic product (GDP). Treasury debt held by the public was US$30.3 trillion as of Sept 30 – about 99% of GDP.
Then, the Republicans’ One Big Beautiful Bill Act sped up the deficit puck, with the Committee for a Responsible Federal Budget predicting that US deficits will average 6.1% of GDP through 2035, pushing debt to 120% of GDP.
This will add substantially to US interest payments, which were already over US$1 trillion in the last fiscal year, having surpassed annual defence spending.
When it comes to assessing inflation and economic growth, policymakers have been skating in fog. The government shutdown and earlier turmoil at statistical agencies have delayed or complicated key releases, leaving market participants and Fed officials to infer what they can from private sources and partial data.
A growing concern is that sticky inflation, tariff-induced uncertainty, and a weakening fiscal position, coupled with a perception that the president will influence Fed decision-making, could unanchor inflation expectations and steepen yield curves.
America remains the biggest player in the economic rink, but its role in the global system is changing fast.
In this context, the combination of tariff wars, unsustainable US fiscal deficits, challenges to international alliances, and diminishing Fed independence poses long-term risks to the US dollar and financial system.
The dollar’s global dominance depends on trust, deep and liquid capital markets, and a safe asset (US Treasury securities), not on treaties.
That trust stems from US institutions, the rule of law, and well-regulated capital markets, as well as the Fed’s reliability in promoting price and market stability.
Stability, in turn, depends on the confidence of a wide variety of participants.
Trust in the global dollar system also rests on the Fed’s willingness to supply liquidity on technocratic, non-political terms. International dollar swap lines and related facilities, first established in 1962, have been essential to mitigating instability during times of global stress.
The Trump administration’s approach to global alliances and tariffs, though, has created uncertainty about its willingness, when needed, to backstop global dollar liquidity. Market participants and central bankers outside the United States have begun to wonder whether swap lines will be as reliable or apolitical as in the past.
When the White House issued statements tying dollar support from the US Treasury to Argentina to the outcome of that country’s midterm election, investors and central bankers paid attention.
The more markets perceive that the availability or scope of dollar backstops depends on political alignment rather than macro-financial need, the more they will price a risk premium into the dollar itself.
The Fed’s independence is not a binary variable. The Supreme Court may yet craft a rationale to distinguish the Fed from other agencies, thus preserving a legal definition of monetary-policy independence.
Substantively, though, the Fed’s independence has already been eroded by White House oversight and Trump’s politicisation of interest-rate decisions.
In the year ahead, with the Fed’s ability to skate independently already compromised, the question is whether the Fed will be allowed to manoeuvre when the game calls for it.
For the sake of the global economy, we should all hope that its next chair still has enough space – and resolve – to head to where the puck is going. — The Korea Herald/ANN
Gary Gensler, a former chair of the US Securities and Exchange Commission, is a professor of the practice in global economics and management and in finance at the MIT Sloan School of Management. The views expressed here are the writer’s own.
