Donald Trump's recent, and unprecedented, attempt to fire a member of the Federal Reserve's governing board has raised alarms among many experts who see it as the biggest threat to the central bank's independence in decades.

For those unfamiliar with the situation, Lisa Cook, a Biden appointee confirmed in 2022, is one of seven key policymakers on the Fed’s Board of Governors who Trump is reportedly seeking to replace. If he can replace her with someone in his corner, he could soon have further influence on rate decisions. Whether Trump has the authority to do so is unclear.

 

These actions have raised valid questions from clients that I would like to address in this blog post:

• What motivates these actions, and what are the potential goals?
• How could a politicized Federal Reserve impact my investment portfolio?

A very brief background on Independence

 

Central banks play a critical role in managing a nation’s monetary policy, which includes setting interest rates, controlling inflation, and ensuring overall financial stability. In the United States, the Federal Reserve (the Fed) was established in 1913, while the Bank of Canada was created in 1935. Both institutions were designed to be somewhat insulated from direct political control, although their journeys to true independence have been gradual.The Federal Reserve’s structure is unique: it consists of a Board of Governors appointed by the President and confirmed by the Senate, twelve regional Reserve Banks, and the Federal Open Market Committee (FOMC). While the President appoints key leaders, once in office, these officials serve staggered, lengthy terms to shield them from political cycles.

 

The Bank of Canada’s independence has also evolved. Initially, the government had more direct control, but over time, reforms have increased the Bank’s autonomy. Today, the Bank of Canada operates under an inflation-targeting agreement with the federal government but sets monetary policy independently to achieve that target.

 

Why Independence Matters

Central bank independence has become a safeguard for economic stability for the below three reasons.

Long-Term Focus: Central Bankers mandate of maximum employment, stable prices, and moderate long-term interest rates requires a long-term perspective. This mandate is a clear conflict of interest with short-term political cycles. Monetary policy decisions often take months, sometimes years, to affect the economy. Independence allows for focus on long-term stability rather than short-term political gains.

Inflation Control: History has shown that when politicians control monetary policy, there is a temptation to “print money” to finance government spending, leading to runaway inflation. Independence helps prevent this.

Market Confidence: Investors and markets trust that independent central banks will act in the economy’s best interest, not for political gain.

 

Despite their formal independence, central banks have always faced political pressures. Elected officials often desire lower interest rates to spur growth, especially before elections, while central banks may need to raise rates to fight inflation or prevent asset bubbles.

Presidents from Truman to Nixon and beyond have all, at times, pressured the Fed to adopt more accommodative policies. For example, President Nixon famously leaned on Fed Chairman Arthur Burns in the early 1970s to keep rates low, contributing to the high inflation of that era. While less publicized, Canadian governments have also occasionally signaled preferences for certain monetary policies, especially during economic downturns. However, the Bank of Canada’s reputation for independence has generally held firm.

 

The Modern Era: Renewed Political Pressure

In recent years, the relationship between governments and central banks has come under renewed scrutiny. The aftermath of the global financial crisis, the COVID-19 pandemic, and the resulting economic challenges have made monetary policy more politically charged.

In the direct aftermath of the pandemic inflation surged to levels not seen since the early 1980s, yet the Fed under Powell maintained its independence, hiking rates aggressively despite political and public pressure. This reinforced credibility, but at the cost of widespread criticism. Trump argued that higher rates were hurting economic growth and the stock market, even as the Fed sought to prevent the economy from overheating.

In 2025, with Trump returning to the political stage, discussions about central bank independence have intensified. Reports indicate renewed efforts to influence the Fed’s policy direction, including public statements and proposals to alter its leadership structure. While the Fed’s legal independence remains intact, these efforts highlight the ongoing tension between political leaders and central bankers.

 

Impact on Financial Markets

For investors, central bank independence has implications for their investments. When central banks are free to act in the economy’s long-term interest, they can better manage inflation and support sustainable growth. These goals can help your portfolio in the long run by reducing volatility and ensuring assets prices stay aligned to their intrinsic value. Political interference, on the other hand, can potentially lead to market volatility (to the upside and downside), higher inflation, and eroded investor confidence. In summary, the independence of central banks is a cornerstone of economic stability and investor confidence. While political pressures are not new, recent developments highlight the importance of monitoring these dynamics. If you have questions about how these issues might affect your portfolio, please do not hesitate to reach out for a personalized review.