Is the independence of the central bank being compromised? Will the US fall into a high inflation cycle?

Goolsbee’s warning hits at the core dilemma facing the Federal Reserve today: political pressure is eroding the central bank’s independence, which could become a trigger for a resurgence of inflation. On Wednesday, multiple Fed officials, including Goolsbee, publicly defended policy independence, directly pointing to the Department of Justice subpoena incident as interference with monetary policy. This not only reflects internal concerns within the Fed but also signals that by 2026, global financial markets may face a direct confrontation between policy and politics.

Why is Central Bank Independence So Important?

Goolsbee explicitly stated in an interview with NPR that the Fed’s independence is crucial for the U.S. long-term inflation rate. This is not just politeness but based on decades of economic practice.

History shows that when central banks are subject to political interference, policymakers tend to favor short-term stimulus at the expense of long-term consequences. Specific manifestations include:

• Overly Loose Policies: To stimulate the economy and employment, the central bank may be forced to keep interest rates too low, even as inflation rises
• Policy Reversals: Political cycles are out of sync with economic cycles, leading to inconsistent and less credible policies
• Worsening Inflation Expectations: If markets believe the Fed is no longer independent, they will anticipate higher future inflation, which can become self-fulfilling
• High Long-term Costs: Ultimately, more aggressive tightening is needed to restore credibility, at a cost far higher than initial mild adjustments

How Serious Is the Current Political Interference?

The pressure on the Fed is real and tangible. The Department of Justice’s criminal investigation into Powell and the subpoenas related to the renovation of the Fed headquarters, which seem technical, are interpreted by many officials as indirect pressure on interest rate policy.

Minneapolis Fed President Kashkari bluntly said, “The escalation over the past year essentially concerns monetary policy.” He emphasized that even if Trump replaces Powell after May, the Fed’s independence in monetary policy must continue to be protected.

The logic behind this is clear: if political forces can exert pressure on the central bank through judicial or public opinion channels, interest rate decisions could be distorted, and the Fed’s credibility would decline.

Impact on Short-term Policy

Statements from Goolsbee and other officials have directly influenced market expectations for the January FOMC meeting. Previously, markets were betting on a rate cut in January, but that expectation has now been largely shattered.

The collective signals from officials are clear:

This means the narrative of “rate cuts starting in 2026” has been discredited. Compared to the easing environment of three consecutive rate cuts totaling 75 basis points in 2025, the policy tone for 2026 is clearly one of continued tightening.

Market Risks Under Political Interference

Personal opinion: The current political pressure on the Fed is extraordinary, and this itself is a warning sign.

Once markets start doubting the independence of the central bank, a chain reaction could occur:

• Rising Inflation Expectations: Markets will price in higher future inflation, pushing up long-term interest rates
• Asset Allocation Adjustments: The attractiveness of risk assets declines as uncertainty about real yields increases
• Weakening of the US Dollar: If investors worry the Fed will be forced to keep rates low, the dollar could lose appeal
• Cryptocurrency Volatility: Historically, whenever policy uncertainty increases, crypto assets face pressure

This is not alarmism. The unified voice of Fed officials underscores their serious attitude toward these risks.

Key Future Dates

Based on current information, several important dates to watch include:

• Late January FOMC Meeting: Expect rates to hold steady, with a statement reaffirming the importance of independence
• May: Powell’s term ends, and the political background of the new chair will become a market focus
• June and beyond: Markets generally expect this to be the window for potential rate cuts, provided inflation continues to decline and the political environment remains stable

Summary

Goolsbee’s warning points to a deeper systemic risk: central bank independence is not optional but a necessary condition for maintaining price stability. When political pressure begins to erode this independence, the risk of long-term inflation rises.

The collective stance of current Fed officials reflects their firm position, but it also signals the seriousness of the issue. Markets need to adjust expectations: 2026 will not be a year of rate cuts but the start of a prolonged policy battle. The key questions are whether political interference can be effectively contained and whether the Fed can uphold its independence under pressure. The answers to these questions will directly determine the long-term trajectory of inflation in the United States.