Well-known geopolitical strategy research institution Clocktower: The political backlash the Federal Reserve cannot escape

Recently, under the continuous pressure from President Trump, the issue of the erosion of the Federal Reserve's independence has once again become a focal point of public opinion. Especially after Trump fired Federal Reserve Governor Lisa Cook and Powell unexpectedly shifted to a dovish stance at the Jackson Hole annual meeting, Wall Street's concerns about the "politicization" of the Federal Reserve have deepened. Against this backdrop, we share an analysis from a recent global report for readers' reference to better understand the political repositioning the Federal Reserve is undergoing.

The well-known geopolitical strategy research institution Clocktower believes that the Federal Reserve has never truly been independent in American history. The so-called "independence" that investors refer to is more of a brief alignment between the central bank's anti-inflation orientation and the neoliberal political consensus since the 1980s. Now, as the dominant ideology in American society shifts from neoliberalism to populism, the political readjustment of the Federal Reserve is almost inevitable.

The so-called "independence" of the Federal Reserve is itself a flawed concept, as it is not explicitly stated in U.S. law. The historical experience since the Federal Reserve's establishment in 1913 indicates that its policies and actions have always been shaped, constrained, and even directly directed by political forces, including pressures from the executive branch, constraints from congressional authorization, and broader ideological trends.

Before 1980: Subservience to Political Forces

Since its founding in 1913, the Federal Reserve has been a product of political compromise and has long been under government control. In its early years, the Federal Reserve played more of a financing tool role for the Treasury rather than acting as an independent monetary authority. During World War I, it provided funding for government borrowing by discounting government bonds at low interest rates. During the Great Depression, President Roosevelt stripped the Federal Reserve of its gold standard constraints through emergency powers in 1933, allowing the Treasury to completely dominate the monetary base and freeze the Federal Reserve's assets. By World War II, the Federal Reserve explicitly committed to keeping interest rates low to reduce the Treasury's financing costs. The then-chairman, Marriner Eccles, even stated that the Federal Reserve was merely "executing the decisions of the Treasury."

The "Treasury-Federal Reserve Accord" of 1951 is often seen as the starting point of modern Federal Reserve independence, ending wartime interest rate controls and allowing the Federal Reserve to aim for controlling inflation. However, this "independence" was merely nominal and was soon eroded by political pressure. In the 1960s, then-President Lyndon Johnson strongly urged Federal Reserve Chairman William Martin to maintain low interest rates to support spending for the Vietnam War and the "Great Society" programs. In 1965, President Johnson was even rumored to have clashed with Martin over interest rate hikes at his Texas ranch. In 1967, a compromise was reached: the Federal Reserve eased its policies in exchange for Johnson pushing Congress to pass tax increases.

President Nixon took it a step further in the 1970s, viewing the Federal Reserve as a political tool. He appointed Arthur Burns as chairman in 1970, expecting him to pursue loose monetary policies, and pressured him repeatedly through over a hundred private meetings during his first term, even leaving explicit instructions in the famous "Nixon tapes" to expand the money supply to aid his re-election in 1972. Subsequently, Presidents Ford and Carter, although employing more subtle means, continued to pressure the Federal Reserve: Ford assured Congress that the money supply would grow, while Carter publicly criticized the Federal Reserve's anti-inflation stance during his campaign

Figure: President Nixon with then Federal Reserve Chairman Burns

In addition to direct intervention by the executive branch, the Federal Reserve is also constrained by a broader political and social atmosphere. Arthur Burns' 1979 speech "The Pain of Central Banking" is the best footnote to this limitation. He pointed out that the persistent inflation of the 1970s did not solely stem from poor monetary management, but from deeper political realities: American voters and elected representatives prioritized employment, growth, and welfare over price stability. Every tightening attempt would immediately bring tangible pain to households and businesses, provoking resistance from Congress and the public, while the long-term benefits of curbing inflation remained obscure. Burns candidly stated that the persistence of inflation was due to a "strong and widespread political preference" for expansionary policies. His conclusion highlighted the political nature of monetary policy: without broad public support, no matter how much the central bank claims to be "independent," it cannot truly suppress inflation.

1980s to 2010s: The "Neoliberal Construction" of Independence

The inflation turmoil of the 1970s opened political space for the rise of neoliberalism. Voters weary of high inflation began to shift right, favoring small government, deregulation, and market-oriented reforms. Reagan's overwhelming victory in 1980 symbolized this shift among median voters, embedding fiscal conservatism and anti-inflation fervor at the core of U.S. economic governance. Against this backdrop, central bank "independence" was redefined as an institutional bulwark against the political motivations behind excessive monetary issuance, with the primary task of ensuring price stability. Volcker's appointment as chairman in 1979 (nominated by Carter and continued by Reagan) was a reflection of this political shift through his firm interest rate hikes.

However, this so-called "independence" has never truly detached from politics. It is essentially a political construct used to promote neoliberal priorities. By placing low inflation (clearly beneficial to creditors and capital holders) above full employment (historically central to pro-labor policies), the Federal Reserve's "independence" effectively became a mechanism to isolate the policy-making process from labor redistribution demands. Therefore, central bank independence is not a return to some "technocratic governance neutrality," but a product of the social and political consensus of the 1980s.

Greenspan's long tenure from 1987 to 2006 further reinforced this model. His leadership during the so-called "Great Moderation," known for stable growth and low inflation, shaped the image of the Federal Reserve as a technocratic body unaffected by political influences. However, beneath this facade, the Federal Reserve under Greenspan actively promoted neoliberal financial liberalization, turning a blind eye to speculative bubbles and creating a policy environment extremely favorable to asset holders. The seeds of the 2008 financial crisis were sown during this period of "market-friendly independence."

Globally, this neoliberal version of central bank independence rapidly spread from the 1990s to the 2000s, widely promoted through IMF loan conditionalities, elite policy networks, and the "Washington Consensus." In the eyes of the international market, "independence" is gradually equated with "credibility," and the definition of "credibility" is narrowly limited to a commitment to low inflation and fiscal constraints.

Figure: Alan Greenspan actively promoted neoliberal financial liberalization (left) The independence of central banks under "neoliberalism" is a product of the "Washington Consensus" (right)

After 2010: The Decline of Neoliberal Consensus and the Resurgence of Political Pressure

The 2008 global financial crisis (GFC) initiated a gradual erosion of the neoliberal consensus that had dominated U.S. economic policy since the 1980s. With increasing income inequality, stagnant real wages, and a deepening perception that "the government saved Wall Street but made ordinary people pay the price," American voters gradually turned to various populist ideologies in the 2010s. This political reshaping weakened societal acceptance of the old orthodox views—fiscal austerity, deregulation, and a limited role for government—replaced by a stronger public demand for direct support for workers and residents. In this context, the Federal Reserve could not isolate itself from the changing political winds.

Figure: The rise of populism (left) calls for a greater role for government in the economy (right)

Janet Yellen's tenure as chair of the Federal Reserve reflects this evolution. Her dovish stance can be explained by traditional macroeconomic logic—low inflation and a fragile economic recovery—but the deeper socio-political environment is equally crucial. Yellen continually emphasized the importance of a "strong labor market" and highlighted the impact of unemployment on individual lives, resonating with the public's skepticism towards "trickle-down economics" (the theory that wealth will naturally trickle down from the rich to the poor).

During the pandemic, the Federal Reserve's performance further highlighted this shift. As inflationary pressures gradually accumulated from late 2020 to 2021, the Federal Reserve was reluctant to tighten policies quickly, insisting that inflation was "transitory." This reflects political sensitivity: millions of families were still slowly recovering from the pandemic's impact, and prematurely tightening policies could easily be seen as indifference or even cruelty towards the working class. In essence, the Federal Reserve's shift in priorities aligns more closely with the increasingly reinforced redistribution demands and pro-labor tendencies of the American public over the past decade. This is not a narrow partisan "leftward" shift, but rather an adaptation to social opinion and the political atmosphere.

Figure: The Federal Reserve's characterization of inflation as "transitory" is fundamentally a political choice

The Inevitable Restructuring of the Federal Reserve's "Independence" During the Trump Era

If the independence of the Federal Reserve in the 1980s was established due to a strong political consensus on neoliberal priorities, its decline during the Trump era reflects the disintegration of this consensus and the rise of populism as the dominant force in American politics. Whether the Federal Reserve can maintain its "independence" has always depended on its political capital—namely, its legitimacy in the eyes of the public and elected officials. In the early 1980s, Volcker's anti-inflation policies succeeded precisely because the American public had lost patience with runaway prices and was willing to support a painful economic rebalancing. In other words, its independence was sustained because it aligned with the preferences of the median voter from the 1980s to the early 2010s.

In contrast, entering the 2010s and the Trump era, the Federal Reserve bore the burden of being perceived as a "establishment elite institution"—a technocratic organization not elected by the public, which rescued Wall Street during the financial crisis while ordinary families suffered the consequences of foreclosures, stagnant wages, and widening wealth gaps. Both left-wing and right-wing populists have expressed doubts about the Federal Reserve's legitimacy.

Under these conditions, especially as public support plummeted to historic lows, the political capital that the Federal Reserve relied on to maintain its independence gradually eroded. An institution once protected by bipartisan consensus is now exposed to public hostility and presidential attacks, no longer possessing the legitimacy that safeguarded it during the Volcker-Reagan era. Essentially, the political environment forces the Federal Reserve to move in line with populist trends. In other words, its policy orientation may increasingly resonate with populist priorities: maintaining a loose monetary environment to support asset prices and tolerating higher inflation under the guise of a "strong labor market."

Figure: American public support for anti-inflation measures in 1980 (left) versus the current Federal Reserve's almost nonexistent political capital to maintain independence (right)

If anyone still believes that the Federal Reserve can maintain independence in this environment, it may be because they have not learned enough from the weakening of judicial independence during the Trump era. On March 14, 2025, U.S. Attorney General Pam Bondi arranged a highly controversial, campaign-like speech for Trump at the Department of Justice headquarters—this marked the first public political statement in the history of the Department of Justice. In our view, this event signifies the alliance between the Department of Justice and populism during the Trump era. If even the U.S. judicial system, long regarded as the most insulated, can be shaped by populist politics, then the Federal Reserve—whose structure is more susceptible to executive appointments, presidential pressure, and public opinion—naturally finds it even harder to resist similar pressures.

Fairly speaking, this political restructuring of the Federal Reserve is not due to the personal weakness of Chairman Powell or a sudden ideological shift within the Federal Reserve, but rather a product of structural forces in American politics. When the preferences of the median voter shift, the independent space for technocrats shrinks accordingly. In a political system dominated by populism, the Federal Reserve can no longer reasonably play the role of a "minority institution" that goes against the tide and insists on anti-inflation priorities On the contrary, it is intentionally or unintentionally participating in a populist agenda—prioritizing growth, employment, and short-term prosperity, even at the cost of long-term inflation risks. Therefore, the fate of the Federal Reserve's "independence" is not shaped by the debates within the FOMC, but rather determined by the broader social and political currents of the American democratic system.

——Clocktower Group Strategy Department