Yves here. Satyajit Das provides a compact overview of why central bank stewardship of the economy is not all that it is cracked up to be. Among the reasons are that the Fed and its ilk are asked to do too many things, some at odds with each other, with no clear priorities. Their economists suffer from groupthink and rely on dodgy models. And the Fed punted when it mattered, as in post-financial-crisis reforms (to its credit, the Bank of England was more bloody minded but lost that war to Treasury).
Das points out that Trump’s fixation with bludgeoning the Federal Reserve into line is in only part about financial repression, as in using low rates to keep the stock market bubbly and to lower the cost of continuing Federal deficits. But is it also about the Federal Reserve’s status as a power center, not in the traditional sense of “independent monetary policy” but as an institution that Trump has yet to dominate. Although Federal Reserve defenders take pains to wrap themselves in the mantle of central bank independence, the resistance is also to try to hold ground against a President who is determined to flatten all obstacles to his exercise of power, and resorting to brute force methods, from threats of prosecution to jackbootery.
Satyajit Das, a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequence – Reloaded (2016 and 2021). His latest book is on ecotourism – Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is an expanded version of a piece first published on 22 December 2025 in the New Indian Express print edition
The spat between the White House and Fed Reserve Chairperson Jerome Powell, a President Trump appointment, is hardly unusual. Lyndon Johnson and Richard Nixon bullied the central bank to lower interest rates.
Central banks function as the government’s banker, issue currency, maintain the payment system and manage the nation’s currency reserves. They safeguard financial stability acting as a lender of last resort to banks although separate bodies sometimes regulate the financial system. The contentious part of their mandate is controlling money supply and setting interest rates.
Central bank independence is recent. In 1990, New Zealand legislated inflation targeting which was adopted by other nations. The concept was that an independent institution would determine monetary policy and maintain price stability minimising opportunities for politicians to use interest rates to boost economic activity especially around elections. The context was the high inflation era of the 1970s and 1980s. It was convenient to transfer painful choices to central bankers allowing governments to blame others or claim credit depending on outcomes.
The case for independence is unclear. The objectives, such as relative price stability, growth, and employment, are frequently contradictory. It is unclear which of multiple measures of price levels is to be prioritised. The 2 to 3 percent inflation objective is arbitrary. Empirical studies suggest that fear of deflation may be unwarranted. There are differences on what constitutes full employment. Data, rarely timely, has methodological problems. The representativeness of items used to measure inflation is contested. Unpaid work, zero-hour agreements and contracting complicates labour statistics. Resource scarcity or sustainability are ignored.
Central banks have limited tools – interest rates, regulating money supply through open market operations, quantitative easing (buying government debt) and forward guidance (open mouth operations or jawboning). Budgets, the currency, international capital flows, and geo-politics (sanctions, trade restrictions) are outside its control.
The underlying economic models focus on NAIRU (non-accelerating inflation rate of unemployment) or the Phillips Curve, a simplistic trade-off between unemployment and inflation. In practice, these relationships are unreliable. Cause and effect are difficult to differentiate. There is no agreement on a neutral (not contractionary or expansionary) interest rate. Central bankers constantly validate Laurence J. Peter’s judgement: “an economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
The problems are compounded by training and backgrounds which lend themselves to groupthink. Central bankers are economists, usually trained at the same universities, who spend their working life around the institution, government or academe and limited commercial experience. Central banks are run by economists providing employment for their tribe. Independent members rarely second guess staff recommendations, even if they have the expertise and information.
Originally reticent, central banks, following the lead of former Fed Chairperson Alan ‘Maestro’ Greenspan, have embraced celebrity. Inscrutable invisibility has given way to volubility, X handles, and Delphic oratory. They play to financial markets with an excessive focus on asset prices which do not uniformly benefit all citizens. Politicians, never happy to share the limelight, increasingly resent the power and public profile of these unelected technocrats. They begrudge having to seek approbation for their policies. US Presidents found themselves forced to kowtow to the all-powerful Greenspan. They increasingly are wary of the threat to their position and re-election that central banks may pose.
Central banks’ records are unconvincing. The Great Moderation of the 1990s and early 2000s, for which central bankers unashamedly claimed credit, was driven by lower rates, the result of Paul Volcker using punitive rates with high human cost to bring down inflation, as well as the entry of China, India and Russia into the global trading system and the growth of information technology. After the shocks of 2000 and 2008, hubristic central bankers used public money to rescue the system without addressing root causes. After 2020, they grossly misread price pressures regarding them as supposedly ‘transitory’. They have persistently ignored the side-effects of their policies such as asset price inflation, rising debt levels, capital allocation distortions, financing governments and social issues like inequality and housing affordability.
The current environment is different, characterised by low growth, slackening trade, challenges to free capital flows and geopolitical uncertainty. Interest rates are less effective in boosting economic activity. Inflation is less responsive to slack in the economy. Government borrowing in the aftermath of the crashes and the pandemic have created unsustainably high public debt and ongoing interest expenses which is unlikely to abate given aging populations, rising welfare costs and tax cuts. The increasingly populist political environment favours low interest rates, high growth, and jobs.
This is allied to suspicion of powerful elite central bankers insensitive to ordinary people’s concerns combined with an internationalist bent which favours globalisation. Vice-chairman of the US House of Representatives financial services committee Patrick McHenry questioned the right of then Fed Chair Janet Yellen to negotiate financial stability rules with “global bureaucrats in foreign lands without . . . the authority to do so.”
Given his sharp political instincts, President Trump senses an opportunity to undermine central bank authority if only by appointing voting Fed governors who favour his desire for short-term rates as low as 1 percent. Rather than institutional reform, the motivation is furtherance of financial repression to disguise sovereign insolvency and maintain artificially high stock and property prices.
Lower rates would allow continuation of profligate governments, with tax cuts and higher spending in sectors like defence and national security which favour the government’s business constituents. Negative real rates and self-fulfilling expectations of inflation are designed to allow the government to inflate away its rising debts and devalue the currency to improve competitiveness. The policy entails transferring wealth from domestic and overseas savers to borrowers. Treasury Secretary Scott Bessant has suggested that the US will de facto use foreign wealth to rebuild American industry and employment through policies forcing foreigners to invest in US industries as directed by the Administration while at the same time reduce the value of overseas investors holdings by weakening the dollar or worse.
Interestingly, the President’s modus operandi for government policy is similar to that he used in his business. Trump enterprises sought growth at all costs. They borrowed big and defaulted if things did not work out.
Framed by the Administration’s critics around central bank independence, the opposition to Trump’s agenda has little to do with the subject. The governing classes’ concern is around the realisation that the Federal Reserve is now one of the few remaining institutions that offers any check on Presidential power given the weakening of Congress, the public sector, and the judiciary.
© Satyajit Das 2026 All Rights Reserved
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100% right. And, of course, once again this is all about the Trump cohort, not Main Street.
I have come to the conclusion that maybe the only way to slow Trump down is for European Central Banks to privately tell Bessent that if Trump doesn’t knock off both the tariff nonsense (more important) and the Greenland stuff that within 24 hours they will announce they will be selling $1 trillion in Treasuries, with an initial sell order of $100 billion.
All Trump understands is force.
Mikerw0: – within 24 hours they will announce they will be selling $1 trillion in Treasuries, with an initial sell order of $100 billion.
Who will be on the buy side, however?
That’s exactly the point. There isn’t one. Will cause markets to tremble, which Trump seems to react to.
The Federal Reserve could be on the buy side as it was in the GFC.
During the GFC, the Feds balance sheet increased their holdings of debt securities from less than 1 trillion to 4.5 trillion.
The Fed has 4.2 trillion of Treasury Securities and 2.1 trillion of mortgage backed securities on their books as of Dec 3, 2025.
They could do it again, not to support Trump but for financial stability.
Dumb and Dumber IOU
https://www.youtube.com/watch?v=n73DD0kv2l4
The Feds pushing gov bond prices high to lower long term interest rates has not been free.
I recall an estimate that the Fed has 1 trillion of unrealized/realized losses on their portfolio.
One wonders if a grateful USA financial industry has thanked the Fed enough.
And what would Europe then do with the dollars they receive from their Treasury sales? What happens next?
Amazing how rational thinking would be expected to be part of make-believe (fiat) currency. As if some how the institutional mechanisms established by power would hobble power. He who has the gold still makes the rules.
Commodity backed money regimes (regardless of the commodity, including gold) ALWAYS loses to fiat regimes in wars, because only a fiat system is flexible enough to engage ALL national resources. Gold backed systems are inherently deflationary — a problem so rare that it is practically forgotten outside of the libraries, but one so debilitating to the state and its people (viz. the Great Depression) that governments will go to ANY lengths to avoid it at all costs.
The “tell” is that “gold standards” (yes, that’s plural — there have been many) are invariably suspended during times of war.
Please explain how the entirely fiat based Confederacy lost to the Union (which issued over 25 million ounces in monetized gold coins from 1861 to 1865) in the Civil War?
p.s.
I misspoke, the CSA did issue a grand total of 4 silver Half Dollars in 1861, so all fiat, except for $2 worth.
The only known specimen sold for $960k about a decade ago.
https://www.pcgs.com/coinfacts/coin/1861-50c-w-12-csa-original/340401
Relative to those here I’ll probably remain an economics gremmie till the day I die. How does gov inflate away its rising debts?
I did not quibble with Das over MMT on this one. What he says would operate for currency users like Eurozone member states.
Excellent article. I often get the sense that Central Banks, are also a buffer against democracy. We have these trained technocrats who have to reign-in populist governments from doing things that could upset the status quo. After all, we can’t have the will of the people interfere with sound business practices. Trump, in this case as in many cases, would be an outlier from the type of populist they were envisioning.
Correct. Central bank “independence” is a charade — one perpetrated with the connivance of your elected representatives who thereby escape responsibility for the economic outcomes of their fiscal policy decisions, simultaneously handing monetary policy over to unelected technocrats (a priesthood or an aristocracy? Pick your poison) and suborning our systems of democratic accountability.
In the US, Congress should control monetary policy. But it is supine, so you will go right on getting exploited.
It’s interesting that the duet of gold and debt rises and falls on the realities of hardship or well being. Gold and debt are both tokens, gold of well being and debt of hardship. But neither token is real. Even though gold is very shiny and debt is dirty. Must wonder why nobody puts social responsibility first. It is almost too bizarre to think about. A YouTube headline recently stated that China puts its goals in a higher priority than financial adjustments. That is probably true. But just to be on safer ground China has amassed a large stockpile of gold. It’s also interesting that everywhere and always both gold and debt are evidence of our existential panic. So I still think that MMT comes closer to being civilized than the alternatives.
I agree with all the comments. But I wonder why the author focuses on power politics-“President Trump senses an opportunity to undermine central bank authority if only by appointing voting Fed governors who favour his desire”- when he begins his piece acknowledging “Central banks have limited tools – interest rates, regulating money supply through open market operations, quantitative easing (buying government debt) and forward guidance (open mouth operations or jawboning)” while a sovereign debt crisis that continues to worsen ($360 trillion in worldwide debt with only $160 trillion in worldwide GDP.
Again like MMT everything is OK when the US dollar is the reserve currency. But with a worsening war in Ukraine unlikely to be resolved (even if Trump did settle 8 wars in his spare time) that has the opportunity to flatten Europe and it’s ability to support US overspending, and Iran (or Gaza) not going away and a potential financial juggernaut in China is growing more powerful as its 1.1 billion population enter the consumer stage of financial maturity, there is a far more dangerous bogeyman just over the next hill.
Why do you think Trump is securing the Western Hemisphere from foreign interests?
My take: Trump wants control of the Fed because it is war by other means. He wants to go for the jugular of his European and Asian vassals by making access to the Fed swap lines conditional on kissing the US boot.
Blowing up banking systems is a geopolitical neutron bomb, wiping out the legal owners but leaving the real assets standing. This is how Trump completes the vassalisation / looting of the YS Empire, by threatening to do it or by doing it.
In my view, he will withhold dollar liquidity when the AI bubble bursts and not merely threaten it because foreign nations would then have to liquidate their collective Treasury holdings to preserve their financial and multinational businesses with US cash calls or accept the seizure of their US subsidiaries (or both, if the bill is high enough). It would be a great reset but the USA would come out less harmed and shriven of much of its government and private sector deficit.
Yes, two can play at that game but the ECB is not a credible brinksman:
– The national governments of the EU are currency users and monetary and fiscal power are divided.
– in a post swap-line crisis world, the US would be the least dirty Western shirt in the wash. It will regain its post-WW2 economic preeminence among the Western nations.
The impact will be uneven:
– Russia, Iran, Cuba etc don’t officially need dollars and don’t care
– China can liquidate its treasury holdings in preference to surrendering its US assets plus it may not be that leveraged in USD and it will provide any imports that other nations withhold out of bitterness (and even lend dollars to other countries at a high price in companies or commodities)
– Japan and Middle East will also survive at the cost of their net investment position (and maybe the ownership of their oil industry in the latter case)
– The UK will be a dollar bankrupt because its net investment position is sharply negative (it was positive until the 1990’s) and its finance sector is huge compared to GDP. Maybe some of the UK banks will declare themselves American (Barclays) or Chinese (HSBC) to escape implosion if the BoE cannot conjure dollars to save them but the City will be crippled. The BoE will be able to mitigate the worst in the domestic real economy because it has a minor reserve currencies and monetary and fiscal unity and it will rescue domestic banks (NatWest, Llloyds, UK-ring fenced ops of the rest)
– EU countries will see their net investor positions wiped out and parts of their banking sector flattened unless united monetary and fiscal action can take place. But can the EU survive the multi-day bank holiday crisis?
– Australia is a dollar debt junkie and will only survive by selling its resource industries to the USA.
WW3 will be fought with Bloomberg terminals, not with Oreshniki.
Except that the enforcement of “spreadsheets” requires power — that’s why international defaults (which is what you are describing) almost invariably lead to “gunboat diplomacy”
The only easy marks for the American Empire are Europe (creditors and competitors) and Africa and Latin America (commodity exporters). None of these have gunboats of any consequence. So they will get shaken down to keep the US Empire afloat.
Since I wrote the above, Trump has already threatened to sanction Treasury holders, which is even less subtle than using the swap-lines behind closed doors.
https://nitter.poast.org/MyLordBebo/status/2014419430995026175#m
Central bank independence is mostly a myth anyhow. It has to fund deficits even if that means doing it through the secondary market. If it doesn’t then it risks creating a financial crisis by collapsing the payment system. And it can not control the money supply for the same reason.
It’s basically only capable of setting the price of money (interest rates); ensuring that the payment system is functioning at all times (assuming it’s not asleep at the wheel); and leveraging regulatory oversight to control/influence credit expansion (and by default monetary expansion; of note this is rarely exercised anymore).
And in the US, even though it totally goes forgotten, the FED is legally subservient to the US Sec of the Treasury whenever there is a policy conflict.
That is why I said that central bank “independence” is a charade.
The question is, cui bono? Not working people, that much is obvious.