Trump attempts to expand influence over the Federal Reserve, intensifying financial market volatility

The formalization of President Trump’s efforts to expand influence over the Federal Reserve System has raised growing concerns about what kind of pressure the financial markets and the real economy could face if central bank independence is undermined.

The heart of the controversy is that the White House’s intentions regarding interest-rate policy could be directly reflected in how the Federal Reserve operates. The Department of Justice, by examining issues related to the costs of the headquarters renovation—specifically whether Fed Chair Jerome Powell may have committed perjury—appears, on the surface, to be a judicial process. However, markets widely interpret it as administrative pressure on the central bank’s top leader by the executive branch, driven by dissatisfaction with the pace of rate cuts. The resignation pressure faced by Board Member Lisa Cook, as well as the nomination of former chair of the White House Council of Economic Advisers Stephen Miran as a Fed governor, are also seen in the same vein. If the executive branch strongly intervenes in the personnel composition of the monetary policy decision-making body, the gap between institutional independence and operational autonomy could shrink sharply.

The congressional hearing for the newly nominated candidate to lead the Fed has also intensified these concerns. At the hearing, he repeatedly emphasized the importance of central bank independence, but he also made remarks that could change the standards used to measure prices or involve a reassessment of the Fed’s current communication approach. This has been interpreted as a signal that goes beyond mere operational improvements and could touch the framework for the Fed’s policy judgments themselves. In particular, since the price index is the starting point for setting the benchmark interest rate, changes to how it is measured could shift the direction of interest-rate assessments. Markets are focused on such remarks because, if institutional adjustments are driven more by political needs than by economic necessity, the Fed’s credibility could be weakened.

U.S. economic history has already shown the consequences of damage to central bank independence. In the 1970s, during the era of the Chad Nixon government, Arthur Burns, who led the Federal Reserve, pursued an expansionary monetary policy by giving in to demands for economic stimulus from an administration seeking re-election—failing to shift to tightening in a timely manner even as inflation pressures increased. The policy playbook, which continued to prioritize growth when prices were rising, was replayed, eroding market confidence and ultimately resulting in stagflation, with high prices and an economic recession occurring at the same time. The so-called “stop-and-go” policy of repeatedly raising and cutting rates at the time reduced policy predictability and even shook businesses’ investment and households’ consumption decisions. The more the central bank is swayed by short-term political schedules, the greater the overall uncertainty facing the economy.

Financial markets are extremely sensitive to such changes. Usually, rate cuts are seen as bullish for stocks, but forced rate cuts under political pressure are a different story. What markets fear is not the rate cuts themselves, but the potential for inflation to rise again and for long-term interest rates to increase. Higher long-term interest rates raise corporate financing costs and put pressure on the valuation of stocks in the present. In fact, during Burns’s tenure in the 1970s, the S&P 500’s gains failed to keep pace with the Consumer Price Index, producing poor real returns. This means that if the central bank is pulled by political logic, it could pay a confidence-loss price far greater than the benefits of short-term stimulus.

As a result, Fed independence is not only a matter of institutional principles—it is a core mechanism that underpins the value of the U.S. dollar, price stability, and confidence in capital markets. If the U.S. government’s attempts to control the Federal Reserve become more openly apparent, and the new leadership changes the standards used for policy judgment and the communication system, the structural instability of the U.S. economy could be further intensified. This trend could not only affect the future U.S. interest-rate path, but also trigger ripple effects on global financial market volatility, the credibility of the U.S. dollar, and how other countries’ monetary policies respond.