The Fed Has Never Been Independent

While Donald Trump’s attacks on the Fed are deeply authoritarian, the institution itself is far from blameless. From the 2008 crash to the pandemic, its primary aim has been to protect the interests of the wealthy.

Financial investors, CEOs of big banks, democratic leaders, and mainstream liberal media outlets have rallied in staunch support of Jerome Powell and the Fed’s political independence. (Kevin Dietsch / Getty Images)

Since the start of his second term, Donald Trump has relentlessly pushed Federal Reserve (Fed) chairman Jerome Powell to cut interest rates. He’s called Powell every name from a “numbskull” who “makes it hard for people to buy houses” to a “stubborn mule” and “major loser,” and consistently threatens to remove his appointment despite the dubious legality. This month, Trump escalated attacks by firing a top Fed official, Governor Lisa Cook, over mortgage fraud allegations. She’s said she has no plans to step down, and has argued the courts will find the decision “unlawful and void.”

In light of this, everyone from financial investors to CEOs of big banks to democratic leaders and mainstream liberal media outlets have rallied in staunch support of Powell and the Fed’s political independence. Last week, the chairman spoke at the Jackson Hole Economic Policy Symposium and was received with a standing ovation. In a speech that did not acknowledge the tense political environment or its stakes, but focused instead on economic projections, Powell signaled that the Fed would possibly cut rates at the next quarterly Federal Open Market Committee (FOMC) meeting on September 16. He argued that the effect of tariffs seemed likely to be “relatively short-lived,” while an economic recession posed a more persistent threat. The next day, stock prices surged showing that, in Keynesian terms, the speech “reignited animal spirits in the market.”

Given public spending cuts, weak growth, extreme inequality, and Trump’s broader authoritarian project, the liberal impulse to rally behind the comparatively methodical Fed — and more generally, to defend “stable institutions” — is understandable. Mainstream narratives argue that the Fed’s independence shields monetary policy decisions from short-term political cycles, making the institution more credible and effective. But much like the outcries to defend the Supreme Court, this instinct robs us of the opportunity to examine the institution more deeply and critically. The Fed is not a neutral guardian of democracy but a political body that insulates the government from radical economic demands and persistently acts in service of capital.

Today’s Fed is relatively dovish; it has monitored Trump’s tariffs and other economic policies across several quarters before deciding how to act on interest rates. But historically, the institution has often moved decisively in crises to stabilize financial markets. During the Volcker Shock of the late 1970s, the Fed engineered a deep recession by hiking interest rates to combat inflation. In conjunction with Reagan-era politics, this helped dismantle organized labor, undermine wage gains, and devastate US manufacturing.

This transformed the balance of power between classes in the United States and helped consolidate neoliberal hegemony. While the Fed has been nominally independent since 1951, it only solidified and sanctified this status after the Volcker Shock, once it showed — in the words of historian Adam Tooze and journalist Cameron Abadi — that it was “credibly committed to price stability and the strength of the dollar.” In that sense, central bank independence as we understand it today is a relatively new concept, and inextricably tied to neoliberalism.

In 2008, the Fed injected liquidity into Wall Street through targeted bailouts to financial institutions and direct support to investment banks such as Goldman Sachs and Morgan Stanley, which were allowed to reclassify as bank holding companies to access the Fed’s safety net. The Fed also encouraged Congress to pass extraordinary measures such as the Troubled Asset Relief Program, which funneled billions to the financial system (what some called the “$700B bailout”).

Later the Fed bought longer-term Treasuries and mortgage-backed securities to lift asset prices and restore investor confidence through a tool called quantitative easing. It also extended  emergency dollar loans, known as swap lines, to European Banks in the eurozone crisis that followed. In the meantime, there was no comparative fiscal redistribution for the millions of Americans facing foreclosure, unemployment, and debt.

During the 2020 pandemic, the Fed acted immediately by slashing interest rates, launching quantitative easing, and reactivating those same dollar swap lines. It also backstopped corporate debt markets, essentially promising to buy up company bonds if investors fled. This sparked a historic rebound for Wall Street, while working-class families waited much longer (and truthfully are still waiting) to see meaningful rent relief, unemployment, or labor protections. Notably, swap lines were also only extended to advanced economies, leaving emerging markets to face dollar shortages, dollar flight, and the pandemic.

These episodes demonstrate that the Fed’s supposed “technocratic neutrality” and transparency (what it calls forward guidance) are in practice designed to reassure and encourage financial investors. Its main monetary policy tools — low interest rates and large-scale asset purchases — work by inflating valuation prices and restoring wealth to those who already own and speculate on financial products. In short, the Fed’s political neutrality is a myth, its transparency is aimed for the creditor class, and its independence has primarily meant prioritizing market stability above all else.

Trump’s effort to scapegoat the Fed for a recession triggered by his own tariffs and mass deportations, along with the GOP’s broader initiative to expand presidential power, poses an undeniable danger. But rallying behind the Fed is no solution. Powell’s cautious upholding of the Fed’s dual mandate reflects the same neoliberal arrangement that isolates monetary policy from democratic accountability and forecloses redistributive ambitions. Independence is not inherently superior to democratic contestation and treating it as such only reinforces the existing political economic order.

The Fed should be recognized for its inherent ideological character, and monetary policy struggled over openly. A central bank that serves people instead of markets could work in close coordination with fiscal policy to finance mass public investment on infrastructure and social goods, guarantee full employment, and secure higher wages. This could place economic issues, from minority and immigrant labor protections to debt jubilee, at the political forefront. As Tooze and Abadi argue, leftists must have an “existential interest in creating a serious politic around central banking.”

At this political juncture, we should resist the reflex to defend institutions that have abandoned the working class in the name of “market stability.” Instead, we must imagine something stronger: a macroeconomic system rooted in democracy, accountable to the public, and far harder to take away.