Reserve needed in handling the Fed, academic warns

President Donald Trump stepped up his social media onslaught against Jerome Powell, boss of the Federal Reserve, this week. The central bank kept interest rates unchanged - partly over concerns about the inflationary impact of the administration's tariffs policies.

Vasso Ioannidou, Professor of Finance at Bayes Business School, says that even the perception that the Federal Reserve is no longer fully independent of politicians could damage the US economy in a number of ways.

"Political interference and public pressure from the executive branch undermine confidence in monetary policy. Even if the Fed remains independent in its decision-making, repeated public criticism from the White House can distort market expectations and add unnecessary volatility. Stability, predictability and adherence to institutional norms are essential for a healthy economy.

"More broadly, the chaos and uncertainty created by the current administration are damaging to economic confidence. Investors and businesses thrive on stability, rule of law, and clear policy direction, yet we are seeing the opposite. In this environment, the independence of the Fed is more crucial than ever, not just for domestic economic stability but for maintaining global trust in U.S. financial markets.

"There is also a longer-term consequence to consider: the erosion of confidence in the U.S. dollar as the world's reserve currency. If political volatility and erratic economic policymaking persist, other global actors will be forced to reconsider their reliance on the dollar, which could have far-reaching implications for the U.S. economy."

"The Fed is acting responsibly by prioritising price stability and waiting for clearer signals on inflation. Policymakers should support this independence rather than jeopardize it with short-term political calculations.

"The Federal Reserve made the right decision in holding interest rates steady. Tariffs are inherently inflationary, as they increase costs for businesses and consumers alike. While lowering interest rates could help support output, it would also risk exacerbating inflationary pressures at a time when inflation expectations are already showing signs of an uptick. Until there is greater clarity on the full impact of these tariffs, the Fed is right to remain cautious."