[Re-Play] Hands Off the Fed: Why Central Bank Independence Is Vital for Economic Stability and National Security

As the administration threatens criminal indictment of Federal Reserve Chairman Powell, here is a replay for those who might have this, originally published on The Steady State Substack, August 3, 2025.

When President Donald Trump suggested he might fire Federal Reserve Chair Jerome Powell over disagreements about interest rate policy, it wasn’t just a breach of political decorum—it was a threat to a cornerstone of American economic stability. The Federal Reserve’s independence has long been a bipartisan norm, respected by presidents from Franklin D. Roosevelt to Ronald Reagan to Barack Obama. While leaders have always expressed opinions on interest rates—some more vocally than others—rarely have they implied the Fed should act at their behest, or worse, that the Fed chair should be removed for disobedience. The consequences of such political interference would be far-reaching—and potentially devastating.

At its core, the Federal Reserve exists to manage the U.S. money supply, stabilize prices, and maintain employment—all while ensuring the financial system operates smoothly. To do this effectively, the Fed must be free to act based on economic indicators and long-term interests, not the electoral calendar or political popularity. If a central bank becomes a political tool, it risks losing the credibility that underpins its effectiveness. And once that credibility is lost, restoring it would be very difficult if not impossible.

Economic Volatility and the Cost of Political Influence

Imagine a world where interest rates are set not according to inflation data or economic output, but by a president trying to goose the economy before an election. In the short term, such politically motivated rate cuts might stimulate spending. But the long-term consequences would be inflation, currency instability, and increased uncertainty for investors and businesses alike. No prudent investor or business owner likes uncertainty. And a weak jobs report followed by the President firing the head of the Bureau of Labor Statistics simply because he didn’t like the news exacerbates those doubts.

A politically captured Fed could also delay raising rates even when inflation surges, for fear of triggering a recession during an election year. No need to imagine that, it’s exactly what played out in the 1970s, when political pressure on the Fed helped fuel a decade of stagflation—high inflation combined with stagnant growth. Only with the painful but necessary rate hikes in the 1980s did the Fed tame inflation and restore credibility. But those hikes triggered a deep recession, which could have been avoided had the Fed been allowed to act earlier and independently.

Markets function best when they can predict, to some degree, the likely response of central banks to economic developments. An independent Fed sends clear signals based on data and deliberation. A politicized Fed, by contrast, introduces a dangerous element of unpredictability. Investors, both domestic and foreign, become less certain about the future of inflation, interest rates, and the value of the dollar. Over time, this uncertainty raises borrowing costs and weakens the economic foundation of the country.

The Dollar’s Role—and the National Security Risk

Beyond economics, there’s a powerful national security argument for defending the Fed’s independence. The U.S. dollar serves as the world’s primary reserve currency. More than 50% of global trade is conducted in dollars, and central banks around the world hold over $6 trillion in dollar-denominated reserves. This “exorbitant privilege,” as former French President Valéry Giscard d’Estaing once called it, gives the U.S. enormous geopolitical leverage.

That leverage depends on global trust—trust in the rule of law, in the independence of institutions, and in the predictability of U.S. monetary policy. If the rest of the world begins to see the Fed as a tool of partisan politics, that trust begins to erode. Central banks in Beijing, Frankfurt, or Brasília may start to reduce their exposure to the dollar. If enough of them do, the cost of borrowing for the U.S. government would rise, potentially by hundreds of billions of dollars. Worse, the U.S. could lose its unique position in the global financial system, diminishing our ability to impose sanctions, manage crises, or even defend our economy against foreign shocks.

Authoritarian regimes around the world already exploit chaos and dysfunction in democratic institutions to bolster their own narratives. A Fed that looks like an extension of the Oval Office hands them another propaganda tool. It also makes coordinated economic diplomacy far more difficult. Allies may begin to hedge their bets, moving away from the dollar and U.S.-led institutions in favor of more neutral alternatives.

Guardrails for the Future

Preserving the Fed’s independence is not just about economic orthodoxy—it’s about protecting the long-term stability and security of the United States. Presidents may always grumble about interest rates. That’s part of the democratic process. But when those complaints turn into threats or outright interference, it’s time to draw a bright line and call it what it is: a recipe for economic disaster. Central bank independence isn’t a luxury—it’s a pillar of modern governance, a guarantor of prosperity, and a shield against the erosion of American leadership in the world.

Bruce Berton served as a U.S. diplomat for over three decades, ultimately rising to the senior ranks of the Foreign Service, including two years as Ambassador and Head of Mission at the Organization for Security and Cooperation in Europe’s (OSCE) Mission to Bosnia and Herzegovina. He is a native of the Pacific Northwest and a graduate of Pacific Lutheran University. He is a member of The Steady State.

Founded in 2016, The Steady State is a nonpartisan, nonprofit 501(c)(4) organization of more than 300 former senior national security professionals. Our membership includes former officials from the CIA, FBI, Department of State, Department of Defense and Department of Homeland Security. Drawing on deep expertise across national security disciplines including intelligence, diplomacy, military affairs and law, we advocate for constitutional democracy, the rule of law and the preservation of America’s national security institutions.