U.S. President Donald Trump, after repeatedly criticizing and pressuring Federal Reserve Chair Jerome Powell, took another shocking action that stunned the markets. He publicly posted a letter on his social media addressed to Federal Reserve Fed Governor Lisa Cook, announcing her immediate dismissal. This move is nothing short of unprecedented in the history of the Fed.

The motivation behind Trump's unconventional actions is largely understood by most market institutions as an attempt to change the Fed's monetary policy by reshaping its board of governors. Before this, Trump had repeatedly criticized Powell, accusing him and the Fed under his leadership of not cutting interest rates quickly enough. According to media reports, Trump had also considered removing Powell from his position as the chair, which was supposed to end next year. Some officials from the Trump administration had also repeatedly criticized Powell for his hesitation to lower interest rates. These politically motivated attempts to influence the Fed's actions have increasingly posed a threat to the principle of central bank independence, a cornerstone of the U.S. financial system, and could undermine the foundations of both the U.S. and global financial markets.

However, in order to maintain the stability of the U.S. economy and reduce the cost of government debt financing, Trump clearly focused more on his own political future to achieve his "MAGA" political goals. Trump stated that he would soon have a "majority" of Fed Board members appointed by him, who would support his desire to significantly lower interest rates. Moreover, even if legal procedures prevent Trump from directly firing a Fed governor, he could still undermine Powell by appointing a successor next year who agrees with his stance on rate cuts. This would allow him to influence the Fed's monetary policy decisions. This means that the independence of the Fed would face an unprecedented threat.

An article from The Wall Street Journal suggests that Trump's actions could mark the end of the Federal Reserve's independence, which has been in place since 1951. The article states that regardless of whether Trump's intentions ultimately succeed, this event could become one of the most pivotal moments for financial markets in decades. If the White House eventually gains control over monetary policy, the U.S. could enter an era of higher inflation and greater volatility. In fact, ANBOUND's founder Kung Chan has warned that this "Trump Shock" could very well repeat the scenario and consequences of the "Nixon Shock". In the short term, monetary policy may lean more towards easing, which could be favorable for the real estate and bond markets. However, in the long term, the politicization of monetary policy could lead to prolonged stagflation and a depreciation of the U.S. dollar, under the condition of the absence of competitive devaluation.

A rather perplexing question is why Trump would relentlessly "repeat the mistakes" of pressuring the Federal Reserve. From an economic perspective, aside from the increasing influence of the U.S. government on markets and the economy, it is also crucial to recognize that the economic foundation of the Fed's monetary policy independence is increasingly being eroded.

In fact, the "Nixon Shock" was understood at the time as a sign of the failure and end of Keynesian government interventionist economic policies. After successfully overcoming the Great Depression, Keynesianism, which advocated for using government spending to influence the economy, became widespread in the post-World War II era. This not only met the needs of post-war economic reconstruction but also aligned with the self-interest of ruling parties in various countries, who sought political gains from supporting economic development. However, the continuous expansion of fiscal spending led governments, including the U.S., into a vicious cycle of rising deficits and increasing debt. At that time, U.S. President Nixon started advocating for interest rate cuts, which marked a case where political views influenced the Fed's decision-making. The result was the onset of stagflation. On the one hand, the stimulative effect of persistent fiscal expansion weakened over time; on the other hand, inflation became a "beast" that was hard to control. The failure of Keynesianism gave rise to the rise of neoliberalism, where monetarism, which focuses on regulating the economy through money supply and reducing direct government intervention, became the dominant policy framework. This was reflected in the Reagan administration's push for supply-side reforms and reducing government market intervention, while Fed Chair Paul Volcker raised interest rates to combat inflation, helping the U.S. navigate the difficult 1980s.

The contraction of the government's role under neoliberal economic theory has made the role of monetary policy increasingly significant, turning central banks into the main actors in policymaking. In this regard, the successful practice of monetarism created the myth of Alan Greenspan as the "economic czar" of the U.S. for two decades, and it established central bank independence as a core policy principle for major economies. However, after Greenspan's departure, the 2008 financial crisis revealed cracks in monetarist theory and gave Ben Bernanke, who had spent his life studying the Great Depression, the opportunity to implement large-scale government market interventions through "new Keynesianism". Unprecedented "quantitative easing" and market bailouts allowed the U.S. to face the once-in-a-century crisis.

However, on one hand, the market failure during the crisis made it difficult for the "free market" advocated by neoliberalism to justify itself, leading fiscal policy to re-enter the policymaker's agenda. On the other hand, the prolonged period of low inflation, low interest rates, and low growth after the crisis caused monetary policy, which primarily relied on interest rate and liquidity adjustments, to gradually lose its effectiveness. Japan and Europe fell into the trap of "zero interest rates" and "negative interest rates," and the U.S. faced similar issues, i.e., low growth, difficulty in raising interest rates, nearly non-existent inflation, and continuous debt expansion fueling asset bubbles.

In particular, Japan's long-term monetary easing has failed to lift the country out of its economic difficulties, becoming a classic counterexample that has led many to question monetarist theory. As it stands, Japan's current efforts to emerge from the "lost decades" have relied not only on monetary easing but also on stronger fiscal policies to drive structural reforms, as well as the implementation of "new capitalism". This approach is essentially similar to the "monetary + fiscal" rescue plan pushed by Ben Bernanke, representing an integrated policy path that combines both fiscal and monetary measures. Moreover, the impact of the COVID-19 pandemic has further strengthened the role and position of fiscal policy within the broader macroeconomic policy framework.

Of course, the Fed's own policy failures have further eroded its authority and independence. One of the reasons that many, including Trump, criticize the Fed is its handling of high inflation after the pandemic. The Fed's "hesitation" in responding to inflation, with neither anticipation nor preparation, and its delayed actions, have led to its continued involvement in the inflation issue. Trump even referred to Powell as "Mr. Too Late". In reality, this loss of control over policy is a direct consequence of long-term "ineffective" monetary policy. On the one hand, prolonged low inflation and low interest rates have limited the scope for monetary policy actions. On the other hand, the divergence between inflation and unemployment has left the Fed in a difficult position, unable to act decisively in either direction.

At the recent global central bank conference, the Federal Reserve adjusted its monetary policy framework, abandoning the "average inflation targeting" strategy that had led to policy delays, and instead returned to the "flexible inflation targeting" framework used half a decade ago. Powell reflected that five years ago, the U.S. economy was in a "new normal", i.e., low growth, low inflation, and an extremely flat Phillips curve, with interest rates long near the effective lower bound (ELB). Since the 2008 financial crisis, the policy interest rate had remained at the ELB for seven years. At the time, it was widely believed that if another recession occurred, rates would return to near zero and remain constrained for a long time, further suppressing employment and inflation, creating a vicious cycle. Therefore, in 2020, the Fed introduced the "average inflation targeting" framework to ensure that inflation expectations would remain anchored at 2% even when interest rates were constrained. However, the situation after the pandemic was completely different, with the economic reopening leading to the highest inflation in 40 years. This was something the Fed had not anticipated.

What surprised the Fed was the significant changes in inflation after the pandemic. In particular, the divergence between inflation and unemployment data has left it in a difficult position. In this regard, in the era of deglobalization, the relationship between inflation and money is showing new changes. The connection between money and inflation is shifting, as is the relationship between inflation and employment, which is causing the monetarism of the globalization era to gradually "fail". In fact, even before the pandemic, both "universal basic income plans" and "modern monetary theory" emphasized the role of government fiscal policy, and they essentially proposed integrated fiscal and monetary policy frameworks. Under this trend, the weakening of central bank independence is a result of monetarism's cyclical decline. Regardless of the consequences, this may be the policy foundation behind Trump's current push to consolidate his control. However, unlike in the past, if the Nixon Shock ended the practical application of Keynesianism through its counterexample, Trump's actions may mark the beginning of the cyclical end of monetarism.

Final analysis conclusion:

To realize his stance on interest rate cuts, U.S. President Donald Trump is pushing for the politicization of Federal Reserve monetary policy in an unprecedented way. This threat to the central bank's independence, beyond political maneuvering, is also rooted in economic fundamentals and the changing financial system amid the trend of deglobalization. These shifts are driving the once globally dominant monetarist economic theory toward its cyclical end. The decline in the Fed's independence may mark the beginning of this economic theoretical shift. In short, Trump's logic has its inevitability; it is just a matter of time for the Western financial world to acknowledge it.