Market Watch
Central Bank Independence Under Pressure: Why the Fed’s Struggle Matters for Global Stability
At the Jackson Hole symposium this summer, global central bankers voiced a rare, shared concern: the independence of the U.S. Federal Reserve is under direct political attack, and the consequences could reverberate far beyond Washington.
The immediate trigger is President Donald Trump’s escalating pressure on the Fed, including calls for Chair Jerome Powell to resign and attempts to remove Governor Lisa Cook from the Board of Governors. While the Fed has historically been shielded by long appointments, legal protections, and its decentralized structure, the current confrontation raises a troubling question: what happens if the world’s most influential central bank loses its independence?
This model spread globally. The European Central Bank, the Bank of Japan, and many others adopted similar frameworks, often written into law or treaty. The results were clear: inflation expectations became anchored, credibility strengthened, and financial markets operated with a baseline of trust that central bankers would prioritize long-term stability over short-term politics.
Undermining that independence risks undoing decades of credibility. If investors believe U.S. monetary policy is being bent to political will, the impact could be profound: higher inflation expectations, higher bond yields, and a re-rating of U.S. Treasuries - the asset that underpins the global financial system.
One clear signal of such political encroachment has already emerged. At the June FOMC meeting, the Fed introduced proposals to ease the Supplementary Leverage Ratio (SLR) requirements for the largest U.S. banks. While framed as a technical adjustment to enhance market functioning, the measure is far from neutral. By loosening capital constraints on globally systemically important banks, the move could unlock over $200 billion in lending capacity, effectively injecting liquidity into the system.
At 3 Comma Capital, we highlighted this development in our Global Crypto Fund June Report, noting that "the winds of change are undeniably blowing through Federal Reserve policy" and that the SLR adjustment was a clear indicator of political meddling in the Fed’s regulatory levers. This marks a shift away from traditional monetary tools towards more direct political influence over credit creation.
Image: 2-Year Note Yield vs. 5-Year 5-Year Forward Inflation Swaps
Market participants seem to agree that the risk to Fed independence is rising, as forward inflation swaps have recently decoupled higher from their prior close relationship with the 2-year note yield, as we can see in the image above. The 2-Year Note Yield is the interest rate on a 2-year government bond. Think of it as what the market believes the Fed will do in the near future. If this yield is high, the market expects the Fed to be aggressive and raise interest rates to fight inflation soon. If it's low, the market expects the opposite. The 5-year, 5-year Forward Inflation Swap is a measure of what the market thinks inflation will be in the distant future (specifically, the five-year period that begins five years from now). Because it looks so far into the future, it's considered a key gauge of the Fed's long-term credibility. It essentially asks: "Do we trust that the Fed will have inflation under control 5, 7, or 10 years from now?"
Normally, these two indicators have a close relationship. If the market sees inflation as a near-term threat, the 2-year yield would rise as people expect the Fed to act. In response, the long-term inflation expectation (the 5y5y swap) should stay stable or even fall, because people trust the Fed’s actions will work. The Fed's near-term actions are seen as effectively anchoring long-term fears.
This decoupling is a red flag for the market. It implies that investors are starting to believe that the Fed might be prevented from doing its job in the future. The fear isn't that the Fed doesn't know how to fight inflation. The fear is that political pressure will force the Fed to keep interest rates lower than necessary to boost short-term economic growth, even if it means letting inflation get out of hand in the long run. In simple terms: The market is starting to price in the risk that the Fed's promise to control inflation is becoming less credible because its independence is under threat.
At 3 Comma Capital, we are monitoring these developments closely, assessing their potential impact on global liquidity, inflation expectations, and investor sentiment. We will continue to update our investors as the situation evolves and as the implications for risk assets and cross-border capital flows become clearer.
The immediate trigger is President Donald Trump’s escalating pressure on the Fed, including calls for Chair Jerome Powell to resign and attempts to remove Governor Lisa Cook from the Board of Governors. While the Fed has historically been shielded by long appointments, legal protections, and its decentralized structure, the current confrontation raises a troubling question: what happens if the world’s most influential central bank loses its independence?
Why Independence Matters
Since the 1980s, when then-Chair Paul Volcker crushed high inflation through tough and very restrictive monetary policy, central bank independence has been seen as the foundation for price stability. Laws granting central bankers long tenures, limited government interference, and a narrow mandate to focus on inflation were designed to insulate monetary policy from electoral cycles and short-term political pressures.This model spread globally. The European Central Bank, the Bank of Japan, and many others adopted similar frameworks, often written into law or treaty. The results were clear: inflation expectations became anchored, credibility strengthened, and financial markets operated with a baseline of trust that central bankers would prioritize long-term stability over short-term politics.
Undermining that independence risks undoing decades of credibility. If investors believe U.S. monetary policy is being bent to political will, the impact could be profound: higher inflation expectations, higher bond yields, and a re-rating of U.S. Treasuries - the asset that underpins the global financial system.
A Dangerous Precedent Emerging
Trump’s clash with the Fed is not just a domestic story. Central bankers from Europe to Asia are watching closely, fearing a “spiritual spillover.” If the Fed can be pressured into cutting rates or reshaping its board for political ends, governments elsewhere may feel emboldened to do the same.One clear signal of such political encroachment has already emerged. At the June FOMC meeting, the Fed introduced proposals to ease the Supplementary Leverage Ratio (SLR) requirements for the largest U.S. banks. While framed as a technical adjustment to enhance market functioning, the measure is far from neutral. By loosening capital constraints on globally systemically important banks, the move could unlock over $200 billion in lending capacity, effectively injecting liquidity into the system.
At 3 Comma Capital, we highlighted this development in our Global Crypto Fund June Report, noting that "the winds of change are undeniably blowing through Federal Reserve policy" and that the SLR adjustment was a clear indicator of political meddling in the Fed’s regulatory levers. This marks a shift away from traditional monetary tools towards more direct political influence over credit creation.
Markets Are Starting to Notice
So far, equities remain buoyant and Treasury yields have not spiked dramatically. But beneath the surface, markets are quietly adjusting. Inflation expectations are decoupling from short-term yields, suggesting that investors are beginning to price in higher long-term inflation risk linked to political interference in the Fed.Image: 2-Year Note Yield vs. 5-Year 5-Year Forward Inflation Swaps
Why This Matters for Investors
For investors, the risks are twofold:- Higher Inflation Premiums: If the Fed’s independence is undermined, markets may demand higher returns to hold U.S. debt, pressuring yields upward and tightening global financial conditions.
- Volatile Cross-Border Capital Flows: Emerging markets and smaller economies that rely on the credibility of independent central banks may see capital outflows if global norms weaken.
Market participants seem to agree that the risk to Fed independence is rising, as forward inflation swaps have recently decoupled higher from their prior close relationship with the 2-year note yield, as we can see in the image above. The 2-Year Note Yield is the interest rate on a 2-year government bond. Think of it as what the market believes the Fed will do in the near future. If this yield is high, the market expects the Fed to be aggressive and raise interest rates to fight inflation soon. If it's low, the market expects the opposite. The 5-year, 5-year Forward Inflation Swap is a measure of what the market thinks inflation will be in the distant future (specifically, the five-year period that begins five years from now). Because it looks so far into the future, it's considered a key gauge of the Fed's long-term credibility. It essentially asks: "Do we trust that the Fed will have inflation under control 5, 7, or 10 years from now?"
Normally, these two indicators have a close relationship. If the market sees inflation as a near-term threat, the 2-year yield would rise as people expect the Fed to act. In response, the long-term inflation expectation (the 5y5y swap) should stay stable or even fall, because people trust the Fed’s actions will work. The Fed's near-term actions are seen as effectively anchoring long-term fears.
This decoupling is a red flag for the market. It implies that investors are starting to believe that the Fed might be prevented from doing its job in the future. The fear isn't that the Fed doesn't know how to fight inflation. The fear is that political pressure will force the Fed to keep interest rates lower than necessary to boost short-term economic growth, even if it means letting inflation get out of hand in the long run. In simple terms: The market is starting to price in the risk that the Fed's promise to control inflation is becoming less credible because its independence is under threat.
The Bottom Line
The struggle over the Fed’s independence is more than a Washington power play. It is a test case for the future of global monetary governance. If political interference wins, the ripple effects will not stop at U.S. borders.At 3 Comma Capital, we are monitoring these developments closely, assessing their potential impact on global liquidity, inflation expectations, and investor sentiment. We will continue to update our investors as the situation evolves and as the implications for risk assets and cross-border capital flows become clearer.
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Duarte Caldas
Investments Principal
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With more than 20 years of experience in financial markets, Duarte specialized in the energy area in the last decade, where he had the opportunity to work with the main European Power and Gas institutions at CIMD Group. Previously, he worked as Market Strategist at IG Markets Iberia.
