Last week, President Donald Trump paid a visit to the Federal Reserve which is currently undergoing renovations. Sporting a hard hat, the president berated a visibly perturbed Fed Chair Jerome Powell for failing to cut interest rates as well as for the renovation’s purported profligacy. Less than a week later, on Wednesday, the Fed resolved to hold rates steady, which will no doubt provoke further complaints from the White House. Between September and December of last year, the lender of last resort finally cut rates from a two-decade high of 5.5 to 4.5 percent based on signs that inflation was nearing the 2 percent limit. But ever since Trump’s return to the presidency, the Fed has refused to make further cuts, leading to broadsides between Trump’s supporters and his critics over the independence of the country’s central bank.
One irony is that Trump’s conflict with the Fed mirrors those of “radical left socialists” abroad detested by MAGA, such as Colombia’s Gustavo Petro and Brazil’s Lula Da Silva—the latter of whom has been the victim of undue meddling in his country’s domestic politics by the US president. Both Lula and Petro have argued that high interest rates harm growth and have little to no effect on inflation given supply shocks following the Covid-19 pandemic. This view has also been voiced by progressive lawmakers like Sen. Elizabeth Warren. While supporters of Fed independence are correct that the executive branch shouldn’t dictate monetary policy, there is a strong case to be made that central banks should take the concerns of their populist critics more seriously.
The rationale behind an independent central bank is that it serves the public interest irrespective of short-term partisan politics. Since the 1970s, however, lenders like the Fed have adhered to the neoliberal logic of protecting investor assets. Central banks manage interest rates and the money supply following a “dual mandate”: controlling prices and promoting employment. In principle, the dual mandate should align with the public interest, but recent events make abundantly clear that this is not always the case.
“Lenders like the Fed have adhered to the neoliberal logic of protecting investor assets.”
Unemployment, for instance, is nominally low at 4.1 percent, but job cuts—particularly in careers with a living wage—rose to 700,000 between January and May of 2025, with large firms increasingly resorting to hiring freezes. More and more workers are resorting to the precarity of rideshare and meal delivery services or dropping out of the labor force entirely. The labor participation rate currently sits near a 50-year floor of 62 percent with more than 25 percent of workers involved in the gig economy to some degree. Undoubtedly, the Fed’s current gauge of full employment is a far cry from the midcentury “affluent society” of John Kenneth Galbraith. This is itself a compelling argument for stimulating growth by cutting rates.
Much the same can be said of the Fed's assessment of inflation which conveniently omits the price of housing and ignores the supply-side effects of higher rates. If prices rise due to issues relating to demand—such as a rapid increase in wages—high rates make loans less affordable, curbing demand and reducing inflation. If, however, inflation is due to issues of supply—as witnessed after the pandemic—high rates may not necessarily reduce prices and may even contribute to inflation by reducing investment and domestic production.
Arguably the most pressing inflationary concern of ordinary, especially young, Americans is the exorbitant increase in home prices from an average of $370,000 to $512,000 since 2020. As high rates have made building new homes less attractive, total housing inventory has fallen to a near 40-year low. Further, existing home sales have slowed as homeowners refuse to sell for fear of losing their current mortgage rate. To give an idea, the average mortgage for a US home is currently affordable to those that make at least $115,000-a-year. Clearly, the Fed’s efforts to curb inflation fail to target the causes of the rising cost of living in the post-pandemic era.
According to many on the right, recent inflation has been caused by high rates of government spending, particularly during the pandemic. But this narrative is flawed given that countries with low levels of Covid-era spending still experienced a corresponding spike in inflation. In Mexico, the left-wing but austere government of Andrés Manuel López Obrador maintained a deficit of just 4.6 percent of GDP in 2020, compared to 13 percent in Brazil and 15 percent in the United States. Yet inflation in Mexico peaked in 2022 at 9 percent, following the same basic trajectory as its northern neighbor. Moreover, as it stands, inflation in the United States has continued its decline since 2022 despite persistently large budget deficits.
The broader pattern of price increases after 2020 has been almost universal outside of East Asia. Latin America’s overwhelmingly hawkish central banks began immediately hiking rates in 2021 and later easing into cuts by 2022 and 2023 in tandem with inflation. In North America and the European Union by contrast, central bankers waited until inflation peaked in 2022 to begin raising rates and only recently initiated cuts. By 2025, however, inflation has returned to at or near pre-pandemic levels regardless of higher or lower interest rates in virtually all cases.
“The broader pattern of price increases after 2020 has been almost universal.”
In the United States, the Fed has cautioned against further cuts under Trump on the grounds that the administration’s tariff policies stand to increase prices. Yet despite the White House’s historic tariff rates, the broader trend of inflation has nonetheless declined from 3 to 2.7 percent since January. The likely reason for this is a corresponding decline in economic growth due to tariffs. Record low consumer sentiment has recovered somewhat since Liberation Day but remains lower than before Trump assumed office. Investments from large firms, particularly in manufacturing, have similarly bottomed out as companies aim to wait out the ongoing trade war. GDP growth is now expected to fall to 1.4 percent in 2025, down from 3 percent in 2024.
The picture is similarly bleak in the European Union, where growth is expected to fall to 1 percent in 2025. In response, the European Central Bank (ECB) continued cutting rates to 2 percent, less than half the 4.5 percent of the Fed, despite the possibility of tariff-related price increases. Why then is scrutiny of the Fed unacceptable given comparable macroeconomic conditions on both sides of the Atlantic? The truth is that our reigning market fundamentalism adheres to an ontological faith in central banks. Fed and ECB policy, we are told, are correct on account of the fact that they were determined by the Fed and ECB. As such, any suggestion to the contrary by democratically elected officials represents a threat to the lenders’ “independence.”
In Brazil, inflation prior to the pandemic stood at around 4 to 5 percent, with the central bank (BCB) holding interest rates at 6.5 percent. Since 2023, inflation has flatlined at 5 percent, but because Lula initially refused to adopt his predecessors’ pre-Covid austerity drives, the BCB subsequently extorted the administration into cutting spending by hiking rates. The monetary shakedown worked, and Lula has cut billions from Brazil’s paltry social budget as interest rates have risen to an unconscionable 15 percent. The twisted irony is that more than 90 percent of the country’s budget deficit is now composed of interest payments, meaning that the BCB could easily reduce spending by simply cutting rates. As elsewhere, it’s not hard to make the case that Brazil’s “independent” central bank is acting at the behest of investors rather than the public interest.
In Russia, the central bank (CBR) is widely regarded to be subservient to the whims of the Putin regime, yet it has pursued a remarkably evidence-based monetary policy. In the wake of the 2022 invasion of Ukraine and western sanctions, the value of ruble collapsed as investors scrambled to sell their assets, and inflation rose to 18 percent. In response, the CBR immediately hiked interest rates to 20 percent and instituted capital controls to prevent the sale of rubles. The result was that the ruble not only recovered but later rose to double its pre-war value by the end of 2024. By April of 2023, inflation similarly fell to an unbelievable 2.3 percent even as the CBR cut rates to 7.5 percent in order to stimulate wartime production.
Russia’s war economy subsequently outperformed its western peers, growing more than 4 percent in 2023 and 2024. If anything, sanctions have been counterproductive as the regime has been forced to prioritize high-paying domestic industries to support the war effort. Record low unemployment has led to labor shortages, which in turn have propelled staggering wage hikes. More recently, the Russian economy appears to have fallen victim to its own success. Wage growth quickly rekindled inflation averaging around 8 percent since 2023 as the CBR has likewise hiked rates back near 20 percent—leading, in turn, to lower GDP growth in 2025.
Tempting as it may be to dismiss the Russian example, the CBR’s success in addressing issues of demand such as shoring up the ruble and curbing a wage-price spiral demonstrates a solid understanding of what monetary policy can and cannot achieve. Indeed, the Russian government’s substantial hikes to the minimum wage—to almost 16 percent in 2024—are compatible only to those seen in Mexico under the ruling Morena party. Since 2018, the Mexican minimum wage has risen at a yearly rate of around 20 percent. For this reason, the central bank’s case for maintaining higher interest rates both before and after the pandemic are similarly compelling with inflation now stabilized at around 4 percent. Tellingly, however, the central bank (Banxico) has continued to cut rates since March of 2024 from 11.25 to 8 percent on account of declining economic growth, as in the European Union.
rThe most compelling argument in favor of central bank independence is that a Fed beholden to Donald Trump would prioritize the president’s self-serving goals which don’t necessarily overlap with the public interest any more than the preferences of investors and bankers. During his 2024 run for president, Trump explicitly called on the Fed not to cut rates so as not to help his Democratic opponents. Similarly, dramatic changes to interest rates should be avoided barring sudden economic shocks like the Great Recession or Covid pandemic. It does not, however, follow that the Fed shouldn’t cut rates simply because the president wishes it to do so.
Further, the White House’s current rhetoric against the Fed is incoherent. While officials have been keen to critique market fundamentalists over tariffs and monetary policy, the administration still claims that government spending under Biden was the sole cause of inflation. Never mind the fact that spending under Trump is now set to increase relative to Biden’s final years in office. To the credit of the Fed and other critics of the administration, a less erratic trade policy would likewise offer more clarity for monetary decisions.
“Less erratic trade policy would likewise offer more clarity for monetary decisions.”
It’s entirely possible, moreover, that more substantial price hikes due to tariffs are still on the horizon. The precise impacts of seismic shocks such as global trade wars or once-in-a-lifetime pandemics are notoriously hard to predict. Indeed, the supply side effects of Trump’s trade war are similar to those that followed the pandemic with the notable difference that tariffs have thus far also reduced demand for imported goods and economic growth. The fact that the administration’s incoherence on trade and lack of industrial policy has substantially slowed economic growth should not be cause for celebration given the precarious state of American workers. That said, as long as growth and inflation continue to decline or stagnate, rate cuts will continue to be eminently desirable.
As currently understood, the neoliberal paradigm for an “independent” central bank consists of inflating assets at the expense of production. Between 2000 and 2023, the S&P 500 grew at ten times the rate of median incomes in the US. In contrast, returns on China’s Shanghai Composite and Hang Seng indices were effectively null during the same period even as GDP more than doubled. Even more shocking is the fact that in recent years the CCP has deliberately smothered China’s overvalued real estate sector in favor of emerging high tech industries and manufacturing. Indeed, the broader orientation of East Asian economies towards production over asset bubbles may explain why the region suffered less from post-pandemic inflation.
Globally, the demand for dollars and US bonds is driven in large part by the Fed’s ability to guarantee the stability and growth of American assets. For this reason, firing the head of the Federal Reserve would in all likelihood trigger a market panic and further undermine the already declining status of the dollar as the world’s reserve currency. Democrats are right to defend the Fed’s nominal independence from the executive branch and Powell’s permanence as chair until his term expires. Yet, as Sen. Warren argued on Bloomberg yesterday, they should continue to advocate for rate cuts even as they also critique the administration’s tariff policy.
As for Trump, by far the best tool for advancing his preferred policy is his constitutional authority to fill upcoming vacancies at the Fed, including the next Chair in 2026. Until then, the lender of last resort should showcase its independence by enacting policy in service of the common good and American workers. In this case, that means cutting interest rates at the Fed’s next meeting in September.