In a quotidian sense, central bank independence refers to the ability of central bankers to make decisions regarding monetary policy without political interference. As Jerome Powell, chair of the Federal Reserve Board of Governors, likes to emphasize: Fed decisions are solely “data-driven.” Independence implies impartiality. A couple years ago, a member of the Fed’s board of governors earnestly explained to an audience of central banking experts that the Fed’s apolitical stance meant that “we don’t talk about politics; we don’t discuss politics.” The same Fed official then went on to emphasize the Fed’s “complete freedom of operation” in conducting monetary policy.

The first attribute (independence from politics) supposedly legitimizes the second (immense power). The Fed isn’t a democratic institution. It is an independent agency. Its board members aren’t elected officials and, in that sense, not accountable to the public. Governor Cook and her colleagues are presidential appointees confirmed by the US Senate. Their terms of service — fourteen years — are shorter only than those of federal and Supreme Court judges.

The Federal Reserve Act describes that the mandate of the board and the Federal Open Market Committee (FOMC, the body that decides the federal funds rate) is to make decisions to uphold the “long-run growth” of money and credit in ways that are aligned with the “long-run potential” of the macroeconomy — to advance maximum employment, price stability, and “moderate long-term interest rates.” The repetition of the phrase “long-run” may seem curious but in emphasizing the long-run horizon, Fed policymakers aim to send the message that they are not swayed by the electoral cycle.

But the Fed isn’t at all indifferent to John Maynard Keynes’s wisdom that, in the long term, we’re all dead: the FOMC is very much in the business of setting the short-term benchmark interest rate, which can shape the course of the short-term business cycle. Changes in the US policy rate impact borrowing rates across the world. Since the 2008 global financial crisis, the Fed’s board of governors has de facto become the central committee of the global financial system, putting out financial conflagrations through massive injections of dollar liquidity via its dollar swap lines and other facilities.

Formally, the Fed’s independence was consolidated in a 1951 settlement known as the Treasury-Federal Reserve Accord. This came about in the context of an overheated postwar economy and US entry into the bloody war in Korea. The US Department of Treasury favored lower interest rates to keep the costs of debt servicing down. This conflicted with the Fed’s desire to raise rates to dampen inflationary pressures. The tussle between the two agencies finally concluded in an agreement that the Fed was no longer required to maintain the interest rate ceiling on US government bonds. No longer was the Fed beholden to the fiscal agent of the administration.

Consistent with Milton Friedman’s flawed precept that inflation is “always and everywhere a monetary phenomenon,” and hence manipulable through changes in the money supply, inflation targeting (to anchor long-term inflation expectations) became the touchstone principle of central bank independence everywhere from New Zealand to the United Kingdom — although famously not in Japan, which still engages in yield curve control. This means that in the context of a low-growth economy, the Bank of Japan intervenes in bond markets to shape interest rates on government bonds of varying maturities. This encourages inflation while also stabilizing large portfolios holding government debt.

The Fed and other major central banks have often failed in their attempts at inflation targeting. For years leading up to the inflationary shock of 2022, actual inflation in the US economy consistently hit below the Fed’s inflation target and as Jerome Powell recently pointed out in his Jackson Hole speech, over the last four years, inflation has persisted above the Fed’s target. (That this has occurred despite the Fed’s attempts at fine-tuning monetary policy — through its repo facilities, which regulate Treasury bond yields and liquidity, points to the multifaceted nature of inflation.) Unlike the European Central Bank, which does not have employment in its central banking mandate, the Fed must balance tamping down inflation with its potentially negative impact on US employment.

In practice, central bank independence means that the Fed does not directly purchase new Treasury securities from the US Treasury. It only purchases government bonds in the secondary market, once they have already been auctioned off in the primary market, where leading financial institutions, known as primary dealers, are expected to absorb new government debt issuance.

When it comes to setting interest rates through the buying and selling of government bonds, the Fed interfaces with this set of dealers whom it has designated as its counterparty in open market operations to maintain its monetary policy stance. These twenty-five entities are either independent broker-dealers or broker-dealer arms of banks that are classified as “globally systemically important.” (Of the fourteen G-SIBs on the primary dealer list, eight are foreign-owned.) In a democracy, this arrangement looks a little bit like an imperial court. And in a globalized financial system that runs on Treasury collateral, codependence between the central bank and the big players in the financial sector has only grown.

While the US central bank nominally gained independence from the government, there is day-to-day coordination between the Fed and the Treasury to ensure that there is enough liquidity in the Treasury market, that payments between Federal Reserve banks clear, and that newly issued Treasuries are successfully auctioned. Fiscal and monetary policy are therefore inherently connected. Fiscal spending has monetary outcomes: a system-wide increase in bank reserves. The lines between fiscal and monetary policy became blurred during the global financial crisis and again during the COVID crisis as the Fed engaged in quantitative easing, buying loads of government bonds and other securities.

Ever since he arrived in office this year, Donald Trump has been pressuring Powell to cut interest rates. Lower interest rates aren’t just rocket fuel for markets; they reduce debt servicing costs — important given that Trump’s tax cuts will blow out the federal budget deficit. But it’s likely that Trump’s love of low interest rates may be rooted in a baser instinct: he ran a debt-fueled business empire and experienced multiple bankruptcies.

Keep in mind that this knock on the Fed is part of Trump’s ongoing assault on the US administrative state; his is an imperial presidency that wants to control the entirety of the government apparatus. Earlier this year, in an executive order, he challenged the Fed’s autonomy regarding financial supervision and regulation.

In a 6-3 unsigned decision in May, the Supreme Court temporarily blocked a lower court decision to reinstate two regulators (from agencies protecting labor) fired by Trump. This decision by the country’s highest court contravened a ninety-year-old precedent protecting federal officials in independent agencies from being fired “without cause.” In its ruling, the Supreme Court (stacked with three Trump appointees) clarified that its decision didn’t affect protections for members of the Fed’s board of governors or the FOMC because the Fed was a “uniquely structured, quasi-private entity.”

Now the Trump administration is testing the Supreme Court’s limits by firing Governor Cook “for cause,” i.e., (unproven) mortgage fraud. Threatening to fire Cook without due process is unprecedented, but this isn’t the first round of artillery fired by Trump in his battle against the Fed. Despite Chair Powell indicating that a weakening labor market following Trump’s tariffs leaves the door open to interest rate cuts, at a recent cabinet meeting, Trump publicly declared his intention to install a loyalist majority at the Fed.

He has nominated Stephen Miran (the current chair of the Council of Economic Advisors, the executive body that advises the president on economic policy) for a vacant seat (either the shorter-term one left by Adriana Kugler, a Fed governor who abruptly resigned earlier this year, or Cook’s longer-term seat if she is forced out). It appears that the next order of business will be to remove regional Fed presidents — selected by local banking interests, all of whom are up for reappointment in February — if they don’t line up with Trump’s agenda.

In Cook’s defense, Janet Yellen, herself a former Fed chair and Treasury secretary, notes that not only is this attempted firing unlawful but that it politicizes the Fed and undermines “the credibility of the dollar itself.” When central bankers talk about the dollar, they also mean dollar-denominated debt instruments like US Treasuries. While still considered the “safe asset” of choice internationally, all three major credit-rating agencies no longer rate US Treasuries as top dollar (AAA). As the drama unfolded, yields on longer-term Treasuries rose, subverting Trump’s mission of lowering rates.

It is important to defend the independence of decision-making by the Fed board of governors without fear of reprisal. However, the Fed is more powerful and more politically insulated than other independent administrative agencies. More oversight and accountability of the Fed enhances democracy, especially given its international role when it comes to providing unconditional dollar liquidity for some while enforcing financial sanctions on others — the Fed ensures banks’ compliance with Treasury’s sanctions programs.

Amid the recent turmoil, Powell justified the independence of the central bank on the grounds that it has “served the public well and as long as it serves the public well, it should continue.” Yet in the name of financial stability, the Fed has insulated the financial sector from its own excesses, while the public is left holding the bag when austerity is enforced in the aftermath of financial crises.

Central bank independence provides a cloak for the financial system’s lack of credibility. This was borne out in the credit market turmoil in 2008. By stabilizing key players in the financial system, the ways in which the Fed resolves financial crises protects rent-seeking and leads to the upward redistribution of income.

The financial hierarchy has become even more concentrated since the 2008 crisis. Back then, the top five banks held a fifth of all US deposits. A decade later, five banking behemoths hold more than 40 percent of all deposits. While the “too-big-to-fail” (today’s G-SIBs) financial institutions were bailed out by the Fed, housing foreclosures led to the largest erosion in black wealth in the United States. Despite being the main source of financing for public infrastructure, US municipalities remain relatively starved of capital.

During the banking turmoil in 2023, US monetary authorities went even further. Two midsized regional banks that experienced a bank run — Signature Bank and Silicon Valley Bank — were not G-SIBs. Corralling the necessary support from US Treasury and President Joe Biden, the Fed invoked a “systemic risk exception” designation for Signature and Silicon Valley Bank. This ended up protecting the mostly rich depositors at these banks. A very high share of deposits at these institutions — about 90 percent in the case of Signature Bank — exceeded the FDIC insurance cap of $250,000. The bulk of the bank bailout — $15.8 billion out of $18.5 billion — went toward making these uninsured balances whole. Both billionaire investor Bill Ackman and Treasury Secretary Yellen favored this course of action.

Despite the Fed’s aggressive stance to curb inflation in 2022, which involved a commitment to reducing its gargantuan balance sheet, following the US bank failures, it took just a week in March 2023 for the US central bank to expand its balance sheet by $300 billion. The Fed provided emergency lending for cash-strapped US financial institutions by creating a brand-new lending facility known as the Bank Term Funding Program (BTFP).

The facility accepted US Treasuries as collateral at par value (exceeding their market price), thereby injecting failing banks with a cash subsidy. For a brief period, for banks given access to this lifeline, Treasuries acquired equivalent status to central bank dollars. In the aftermath of this spectacular rescue, when the Fed attempted to impose greater capital buffers on big US banks, it was met with pushback from the financial industry, resulting in a watered-down capital buffer proposal.

In the name of neutrality, the Fed has shied away from supporting households, public investment, green infrastructure, and a liquidity pipeline to the International Monetary Fund for countries in the Global South facing dollar shortages. While resource scarcity is real, money scarcity can be solved through technocratic solutions. (New fiscal agencies supported by the US Treasury have a role to play here.)

An idea that gained currency among foreign policy hawks in the Biden administration has been co-opted by the Trump administration: that the hegemon of the international order isn’t the system’s prime beneficiary but instead bears an unreasonable burden by providing international public goods — such as dollars or NATO — and keeping its market open to the rest of the world. Meanwhile China and other export-oriented growth regimes have taken full advantage of US consumers purchasing their exports while keeping their own markets relatively closed.

The cost of absorbing the rest of the world’s trade surpluses has, the argument goes, led to the decimation of US manufacturing capacity and competitiveness. While the Biden administration focused its ire on China, the Trump administration has also accused other trade surplus economies, namely, Germany, Japan, and South Korea, not just China, of consumption suppression. Trump’s tariffs on other countries are a call for “reciprocity” in trade relations. His executive order pertaining to tariffs reiterates a Biden-era mantra that “US market access is a privilege not a right.”

In an influential policy brief published last year, Miran argued that a structural demand for dollars in the global economy leads to dollar overvaluation, which, in turn, contributes to the persistence of the US trade deficit. It is true that (lagged) exchange rates are loosely correlated with the US trade deficit — roughly speaking, from 2010 to 2024, as the dollar appreciated, so did the trade deficit. However, there are times, such as between 2003 and 2008, when the US trade deficit has expanded even though the dollar depreciated. Dollar depreciation alone cannot shrink a trillion-dollar US trade deficit.

Miran has outlined an ornate proposal to reduce dollar overvaluation and force other countries to lend on a long-term basis to the United States. Influenced by Zoltan Pozsar, a former senior Treasury advisor during the Obama administration, Miran proposes that other countries exchange their holdings of short-term Treasuries for century-long US bonds if they want to continue being under the US defense umbrella. To compensate these creditors for giving up their liquid dollar assets, Fed swap lines will be made available to them to meet unexpected liquidity pressures.

In Miran’s plan, the resulting demand for long-term Treasuries will drive up their prices and lower long-term yields. Requiring countries to sell their dollars has the added benefit of reducing the dollar’s exchange rate, the prices of US exports, and the US trade deficit. If countries don’t give up their short-term Treasuries, they will be charged user fees. (Treasury secretary Scott Bessent has even proposed a US sovereign wealth fund where other sovereigns contribute to US wealth.)

Miran’s proposal if enacted will mean we are in Bretton Woods III — a completely weaponized dollar bloc. If countries are compelled to pressure their central banks to purchase century bonds, central bank independence as we know it is over. Over the last few years, inflation, geopolitical volatility, and the fear of sanctions have led foreign central banks to ramp up their purchases of gold. And at present, foreign central banks hold more gold than US Treasuries. (For now, this should not be understood as central banks dumping Treasuries for gold. Recent interest rate hikes have led to price declines in Treasury bonds while varied Trump effects — from tariffs to encroachment on the Fed’s independence — have led to a record surge in already-elevated gold prices.) If countries choose to reorient their financial and trade networks outside of the dollar’s sphere, it’s very possible that these MAGA plans, if they were to come to fruition, would do more harm to the global dollar system than any of the US’s harshest critics could have ever wished to inflict upon it.