Monetary Orthodoxy and the Last Stand of an American Institution

He has undermined the international rules-based order at nearly every turn, formally repudiated the Washington Consensus and dismantled the West’s post-Cold War unipolar worldview.

He has sought to replace multilateral institutions with personalized alternatives, including a self-styled 'Board of Peace'.

Likewise, he has bullied allies and adversaries alike, with much of the global political and business elite, at home and abroad, ultimately bending to his pressure. Backed by a sympathetic Supreme Court, he has dismissed governors of multiple federal agencies, further consolidating executive power.

One institution, however, remains standing: the Federal Reserve.

Trump failed to subdue the Fed during his first term, despite repeated attacks and stacking its board with political allies. In his second term, he has doubled down, this time targeting a chair he himself appointed, yet has again failed to exert decisive influence.

After months of verbal attacks and legal pressure, the most he has achieved is the nomination of a former inflation hawk and ideologue rather than an outright populist, as Jerome Powell’s prospective successor, in the hope that loyalty might succeed where intimidation failed.

Why it matters for crypto

Crypto narratives often frame digital assets as "digital gold" or as hedges against monetary debasement. 

Recent market ruptures have seen Bitcoin acting like the "high-beta tail of global risk," meaning it gets hit hard when macro sentiment turns negative but doesn’t enjoy the same degree of upside when equities recover. 

In periods of geopolitical stress, capital flows to gold. During supply-driven inflation shocks, it flows to energy. Crypto adoption surges mainly in countries like Iran or Venezuela only after hyperinflation and capital controls are already in place. 

Similarly, central banks are expected to continue to drain liquidity out of the system this year.   

In that context, a politicized or weakened central bank that would trigger large negative market shocks is unlikely to benefit crypto investors in the short term. And it probably will not provide a decentralized monetary system as an alternative either. 

While parts of the crypto community position themselves as adversaries of the Federal Reserve, it may ultimately be in their interest for the Fed to remain independent, and for the broader financial system to remain stable. 

“As I thought about it, it might have been hard to explain why I didn’t attend. Paul Volcker famously attended a Supreme Court case in 1985 or so.”

– Jerome Powell, Chair of the Federal Reserve

The church

Macroeconomics is a quantified social science built on theory, abstraction and simplified assumptions about human behaviour. 

To operate within it requires a degree of faith. Concepts such as the "natural rate of interest," which anchors central bank policy, cannot be directly observed or measured in real time.

For this reason, central banks are often likened to churches, institutions that maintain order through doctrine and credibility. Until recently, their leadership was dominated by technocrats with deep academic credentials. 

When politically appointed leaders lack the approval of this informal clerical class, they face scepticism from markets and heightened scrutiny, as both the European Central Bank's Christine Lagarde and Jerome Powell did early in their tenures. A law degree or international finance experience alone has rarely been considered sufficient.

In most democracies, central banks are operationally independent, shielded from direct political control. The Federal Reserve is no exception. As Powell explained at a recent press conference:

"To have a separation between, and not have direct elected official control over, the setting of monetary policy is critical. Monetary policy can be used through an election cycle to affect the economy in a way that may be politically worthwhile."

In the US, the Fed chair is accountable to Congress. Historically - Trump aside - it has been customary for Fed governors to be reappointed regardless of which party holds power, underscoring institutional independence. Powell, a Trump nominee, was reappointed by Democratic President Joe Biden in keeping with that tradition.

A cautionary tale

History offers no shortage of examples where political interference in central banking ended badly.

In Turkey, President Recep Tayyip Erdoğan removed term protections for the central bank governor in 2018 and dismissed three governors who resisted rate cuts. Inflation subsequently surged from around 14% to over 60% by 2022–23. 

In Argentina, President Cristina Fernández de Kirchner dismissed central bank governor Martín Redrado after he refused to use the central bank's reserves to service government debt. In India, sustained pressure from Prime Minister Narendra Modi’s government led to the abrupt resignation of RBI governor Urjit Patel in 2018, unsettling markets, weakening the rupee and contributing to rising inflation.

The US had its own episode. President Richard Nixon pressured Fed Chair Arthur Burns to keep policy loose ahead of the 1972 election, exacerbating the inflationary spiral of the 1970s.

Consistent with these cases, IMF research has found a strong negative relationship between central bank independence and inflation outcomes.

Notably, some autocratic leaders, among them Vladimir Putin, Jair Bolsonaro, Hosni Mubarak, and Lee Kuan Yew, largely refrained from interfering in monetary policy, allowing central banks to respond to macroeconomic realities even as they pursued more typically authoritarian policies elsewhere. 

Their restraint helped preserve economic stability despite broader governance failures.

Model central banker and institutional resistance

When Powell was asked why he personally attended the Supreme Court hearing in the mortgage fraud case involving Fed governor Lisa Cook, he reached for history.

"As I thought about it, it might have been hard to explain why I didn’t attend. Paul Volcker famously attended a Supreme Court case in 1985 or so," he said.

The invocation of Volcker was no accident. Volcker replaced Arthur Burns as permanent Fed chair in 1979 and raised interest rates as high as 20% to contain inflation unleashed by oil shocks and policy drift. 

Over time, Volcker, cigar in hand, became a symbol of central bank independence and uncompromising discipline.

As a result of his decisive and often controversial actions, inflation and future expectations of price rises fell sharply, albeit at the cost of higher unemployment and a brief recession. Volcker endured intense public anger, bipartisan political attacks, calls for resignation and even threats of impeachment.

Inflation would remain subdued for decades, until excessive fiscal spending and pandemic-related supply shocks caused it to surge again.

Following the global financial crisis, he also proposed the 'Volcker Rule,' later incorporated into the Dodd-Frank Act, that limits banks' proprietary trading.

Inflation expectations have declined since Volcker

(Source: Federal Reserve Bank of Cleveland)

Trump’s guardrails

But it is not the approval of fellow policymakers, academics or economists that Trump seeks. 

Informal norms and institutional etiquette do little to restrain him. But the Federal Reserve, and its peers in advanced economies, retain something Trump cannot ignore: the trust of financial markets.

Markets frequently disagree with the Fed, accusing it of being behind the curve or questioning the effectiveness of its tools. Yet markets and central banks operate within the same theoretical and institutional framework. The moment the Fed is compromised for political gain, that social contract breaks. Trust evaporates, and with it, market stability.

In practice, markets have repeatedly forced Trump to reverse course. The abrupt walk-back following the 'Liberation Day' tariff announcements was a clear example.

Central bankers also enjoy relatively high public trust, particularly in societies deeply scarred by inflation. One could plausibly argue that inflation was the single most decisive factor in the most recent US presidential election. While Fed communications are technical, they often resonate more with voters than partisan rhetoric. Technocrats, for all their flaws, are still seen as more credible than most elected officials.

Trust in Powell vs. Trump on interest rates

(Source: Economist / YouGov Poll, 16-19 Jan, 2026)

Fed independence is also one of the few areas where Republican lawmakers have openly challenged the president. Senator Thom Tillis has pledged to block any nominee for Fed chair until legal actions against Powell are dropped. 

Meanwhile, the Republican chair of the Senate Banking Committee, Senator Tim Scott, has played down any alleged criminal behaviour by Powell regarding the Fed's $2bn renovation, as cracks begin to emerge in the party's position amid intense pressure on the governor.

"This is all about sending a signal to the markets and to the business community that Fed independence is critically important," Tillis said.

The Supreme Court has likewise emphasized the Fed’s unique quasi-private structure.

Even if a future Fed chair were inclined to follow Trump’s demands, and even if a majority of the board agreed, the combined pressure of markets, courts, Congress, and public opinion would ultimately force rational policymaking. 

Despite all signs to the contrary, in 2026, institutional gravity still matters.