The Fed’s Fight for Survival — Markets Stay Calm While Economists Sound the Alarm

TradingKey - According to a recent Financial Times survey, most economists believe financial markets are still underestimating the long-term economic damage caused by President Donald Trump’s efforts to politicize the Federal Reserve, warning that an independent central bank could become a government puppet — and potentially pose even greater risks than Turkey’s central bank.

From attacking Fed Chair Jerome Powell as “Mr. Too Late” on rate cuts, to strategically nominating Stephen Miran to fill a vacant Fed governor seat, to launching a legal battle against Governor Lisa Cook, the Trump administration has spent months expanding its influence over the Fed — with the clear goal of forcing earlier and deeper rate cuts.

Despite repeated warnings from economists that undermining Fed independence could erode confidence in U.S. dollar assets and trigger global financial instability, capital markets have only occasionally reacted, remaining largely unfazed. While the risks are widely understood, 82% of surveyed economists said financial markets have so far only partially or mildly priced in these risks, while 12% said the impact hasn’t been priced in at all.

As of August 29, the S&P 500 has posted four consecutive months of gains, setting 20 all-time highs this year, while the Nasdaq Composite has risen for five straight months.

A late-August FT survey of 94 economists found that 89 respondents warned that the escalation of Trump’s attacks on the Fed has already damaged its credibility.

Many said that once Powell’s term as Chair ends in May 2026, these attacks could weaken the Fed’s ability to control inflation, permanently shift its policy focus toward employment and economic stimulus, and lower the government’s borrowing costs.

Over half of the economists surveyed expect 2026 to be a critical year for assessing whether the Fed’s policy priorities have changed, predicting that the world’s most important central bank may begin sacrificing price stability to help the U.S. government borrow cheaply under political pressure.

Christiane Baumeister, an economist at the University of Notre Dame, said:

“The Fed will become a puppet of the government.”

The survey found that over a quarter of economists fear that by 2029 — the end of a potential second Trump term — the Fed will no longer be able to fulfill its mission of keeping U.S. borrowing costs free from political influence. Still, 45% of respondents believe it’s too early to judge what the situation will be.

Economists agree that weakening Fed independence will harm the world’s largest economy.Rüdiger Bachmann, economics professor at the University of Michigan, noted:

“This is one area where most economists agree. The Fed’s independence leads to lower and more stable inflation and financial stability.”

LBBW economist at Deutsche Bank said Turkey is a cautionary tale of what happens when a government controls its central bank, and warned:

“The US dollar has more credibility to lose than the Turkish Lira.”