The tug-of-war that has played out for several months, under the spotlight of the media, between the President of the United States and his counterpart at the Federal Reserve, goes far beyond the near-term trajectory of U.S. policy rates. It questions the very role of a central bank and the importance of its independence from political power.
Wherever they are, central banks share a fundamental mission: they are guarantors of price stability and thus of the preservation of money’s value. The “acceptable” level of inflation, however, may vary: 2% for the Federal Reserve or the European Central Bank, but 2–3% for their Australian counterpart, for example.
In some cases, inflation control may also involve exchange-rate management. For highly open economies, if the currency remains stable against the U.S. dollar or a basket of currencies, as in recent years with the People’s Bank of China, then price indices should also remain stable. Similarly, the Swiss National Bank, which closely monitors the franc’s movements, takes a comparable view: excessive exchange-rate swings have major consequences on inflation, hence occasional interventions to influence the franc and ultimately preserve price stability.
Among central banks, the Fed stands out not only due to the dominance of the U.S. economy and the dollar, for which it acts as “guardian,” but also because its mandate is dual. The 1977 reform law, passed in the wake of painful stagflation, requires it to ensure price stability while simultaneously promoting maximum employment. These two goals are often contradictory: a restrictive monetary policy to contain inflation tends to slow economic activity and job creation, whereas a very tight labor market risks sparking a wage-price spiral.
To be precise, the Fed’s mandate, as stated in the Federal Reserve Act, is actually triple. Beyond price stability and full employment, it must also promote moderate long-term interest rates. Long overlooked, or seen as a natural outcome of the other two goals, this objective was recently highlighted by the newest Fed governor, Stephen Miran.
To fulfill such missions, or multiple ones in the Fed’s case, it is essential that a central bank operates independently. Various indices exist to measure this independence, based on legislation, governance, transparency, or financial flows. A February 2024 study by Professor Davide Romelli (Trinity College Dublin) covering 155 countries from 1923 to 2023 shows remarkable progress, with waves of reform especially in the 1990s and after the 2008 financial crisis. At their inception, central banks often had entirely different roles, namely to finance governments, particularly wartime expenditures.
Another study, published by the World Bank in July 2023, analyzing developing countries over the 1972-2023 period, demonstrated a clear link between central bank independence and sovereign borrowing costs, hence their ability to raise funds in public markets.
How then can one not be concerned by the repeated attacks launched in recent months by Donald Trump against the Fed Chair? These include not only his frequent and vehement criticism via social media, but also his desire to reshape the policy committee to include more advocates of rapid, sharp rate cuts, such as the aforementioned Stephen Miran. All this, of course, short of being able to dismiss Jerome Powell, whom Trump himself had appointed, and whose term ends in May 2026.
Against this backdrop, the September 17th announcement of a 25 basis point cut in the federal funds rate was interpreted by some as a forced concession by Powell, particularly as long-term rates reacted in the opposite direction, a sign of lingering inflation fears in bond markets.
Still, concluding that the Fed’s independence has been compromised seems premature. This rate cut had been foreshadowed by Powell’s remarks at Jackson Hole in late August, is well justified by recent weakness in U.S. labor market data, and is hardly enough to alter corporate decision-making. Put differently, the Fed’s credibility and independence appear intact. Only a scenario of repeated and aggressive rate cuts amid clear inflationary pressures, which we do not foresee, would genuinely call that independence into question.
In the meantime, Powell’s resilience in navigating his difficult role deserves recognition. More broadly, central banks must be supported in their mission of preserving financial stability. Contrary to what some cryptocurrency advocates argue, they do not manipulate currencies or markets for their own benefit or that of governments. On the contrary, they act as safeguards, protecting populations from misguided political agendas. They also step in during major shocks, providing liquidity to ensure smooth monetary transmission. And thanks to them, the volatility of savings is contained over time, something neither gold, nor Bitcoin, has been able to guarantee.
This is a marketing communication issued by DECALIA SA. It is not intended to be distributed or used by any person or entity who is a citizen or resident of a locality, country, or jurisdiction where such distribution, publication, availability, or use would be contrary to law or regulation. Please refer to the latest version of the fund prospectus and the Key Investor Information Document (KIID) before making any final investment decision.
The information and data presented in this document should not be considered as an offer or an invitation to buy or sell securities or financial instruments or to subscribe to services. The information, opinions, estimates, calculations, etc. contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Investments in securities or financial instruments may not be suitable for all recipients and may not be available in all countries. This document has been prepared without taking into account the objectives, financial situation, or needs of any particular investor.
Before entering into any transaction, investors should ensure that it is suitable for their situation and personal objectives. Any investment, trading, or other decision should only be taken by the client after a thorough review of the product fact sheet, subscription agreement, information memorandum, prospectus, or any other offering document relating to the issuance of securities and other financial instruments. Where a document refers to a specific research report, the document should not be read in isolation without consulting the full research report, which can be provided upon request.
Past performance is neither a guarantee nor a reliable indicator of future results. The scenarios presented are an estimate of future performance based on past evidence of changes in the value of this investment and/or current market conditions, and they do not constitute an exact indicator. What you will receive will vary depending on market developments and the length of time the investment/product is held.
Unless otherwise specified, charts are created by DECALIA SA based on data from FactSet, Bloomberg, or Refinitiv.