“Lambasting the Fed has become a go-to move in Trump and Co. arsenal.” --- Why? --- “The Fed walks into every room with more built-in credibility than any elected official.”

In the world of modern economic management, few institutions wield as much influence—or attract as much scrutiny—as central banks. Chief among them is the U.S. Federal Reserve, long regarded as the bulwark against inflation, recession, and financial instability. Its independence from short-term political pressure is a cornerstone of American monetary credibility. Yet history shows that this autonomy is neither absolute nor guaranteed.
This article explores critical moments in U.S. history where the Federal Reserve’s independence was compromised, the economic consequences that followed, and how similar dynamics have played out in Turkey and Hungary (more on this below). As the global economy faces mounting political pressures and fiscal strains, these lessons have never been timelier.

On Politicians, the Fed, and Candy Stores

No matter how brainy politicians may seem, they tend to make decisions like they are prepping for the next election, not solving a macroeconomic puzzle. Nowhere is this more worrying than in their growing desire to treat the Federal Reserve like a vending machine for policy candy. Trump and his Project 2025 crew are not just eyeing the Fed—they are practically salivating over the idea of muzzling it. Imagine handing the keys of a candy store to a pack of sugar-crazed toddlers: short-term euphoria, long-term stomachaches, and someone inevitably vomiting on the Constitution. Undermining Fed independence might feel good in the moment, but the crash that follows could leave the economy in a sticky mess no one wants to mop up.

Decision-Making Process at the U.S. Federal Reserve

The U.S. Federal Reserve makes monetary policy decisions through the Federal Open Market Committee (FOMC), which meets eight times a year to assess economic conditions and determine the appropriate policy stance. The FOMC consists of the seven members of the Board of Governors, the president of the New York Fed (a permanent voting member), and four of the remaining eleven regional Fed bank presidents who vote on a rotating basis. Before each meeting, staff economists prepare detailed analyses, and committee members consult regional data and contacts. During meetings, members deliberate on key indicators such as inflation, employment, and economic growth, then vote on policy actions like adjusting the federal funds rate or conducting open market operations. Decisions are made by majority vote and publicly communicated through official statements, press conferences, and published minutes, in line with the Fed’s dual mandate to promote maximum employment and price stability.

I. U.S. Historical Cases of Central Bank Subordination

1. The 1930s: Roosevelt and the End of the Gold Standard

During the Great Depression, President Franklin D. Roosevelt (FDR) launched a series of interventions that redefined the relationship between the executive branch and the Federal Reserve. In 1933, he suspended the gold standard, and in 1934 devalued the dollar from $20.67 to $35 per ounce of gold via the Gold Reserve Act. This was a critical move aimed at stimulating inflation and easing debt burdens.
Simultaneously, the Banking Act of 1935 centralized monetary authority by empowering the Board of Governors—appointed by the President—over the regional Federal Reserve Banks, which were previously more autonomous.
These reforms increased the federal government’s influence over monetary policy, especially as the Fed was also tasked with supporting New Deal financing initiatives.
Source: Federal Reserve History (https://www.federalreservehistory.org/), "Banking Act of 1935"

2. 1942–1951: The Wartime Peg and Treasury Dominance

During World War II, the Federal Reserve agreed to peg interest rates to help the Treasury finance the war effort cheaply. Short-term Treasury bills were fixed at 0.375%, and long bonds at 2.5%. This arrangement persisted through the late 1940s, even as inflation surged following the lifting of wartime price controls.
The Fed’s inability to raise rates due to political commitments created tensions with the Treasury. These were resolved in the landmark 1951 Treasury-Federal Reserve Accord, which restored monetary independence by ending the yield peg.
Source: Meltzer, A. H. (2003). A History of the Federal Reserve, Volume 1. University of Chicago Press.

3. 1965–1971: Johnson, Nixon, and the Great Inflation

The 1960s and early 1970s featured some of the most politically charged interference with the Fed. President Lyndon B. Johnson pressured Fed Chair William McChesney Martin to keep interest rates low to finance the Vietnam War and his Great Society programs. This culminated in a meeting where Johnson reportedly shoved Martin against a wall at his Texas ranch, demanding compliance.
Under President Richard Nixon, the politicization deepened. Nixon installed Arthur Burns as Fed Chair and pressured him to maintain expansionary policy to ensure re-election in 1972. Meanwhile, in 1971 Nixon ended the convertibility of the U.S. dollar to gold, effectively ending the Bretton Woods system. The result was an unprecedented surge in inflation.
Sources: Silber, W. L. (2012). Volcker: The Triumph of Persistence. Bloomberg Press; Fed History (https://www.federalreservehistory.org/)

II. International Examples: Turkey and Hungary

1. Turkey: Erdoğan’s Unorthodox Economics

President Recep Tayyip Erdoğan has repeatedly undermined the independence of Turkey’s central bank. Between 2018 and 2023, he replaced multiple central bank governors who refused to cut interest rates despite soaring inflation. Erdoğan's belief that high interest rates cause inflation (contrary to economic orthodoxy) led to unorthodox policy decisions.
By late 2022, inflation in Turkey had reached over 80%, and the Turkish lira had lost over 75% of its value against the U.S. dollar. Investors fled Turkish assets, and capital controls were tightened.
Source: International Monetary Fund (IMF) Country Reports on Turkey; Reuters, Bloomberg (2022–2023 coverage)

2. Hungary: Soft Capture under Orbán

Hungary under Prime Minister Viktor Orbán represents a more subtle form of central bank influence. Since 2010, Orbán has appointed close allies to the Monetary Council of the Hungarian National Bank (MNB), including György Matolcsy as governor. While maintaining nominal independence, the MNB has often aligned with government policies.
Hungary experienced persistent inflation over 15% in 2022–2023 and a weakening forint. Though less dramatic than Turkey, the erosion of institutional independence has affected Hungary’s investment climate and bond market credibility.
Source: European Central Bank Reports; OECD Economic Surveys: Hungary (2023)

III. Consequences of Politicized Monetary Policy

- Inflationary Bias: Governments tend to prefer looser monetary policy to finance deficits and boost growth before elections.
- Currency Depreciation: Markets lose confidence in monetary management, leading to capital flight and FX instability.
- Interest Rate Volatility: Without credibility, central banks must hike more aggressively later to re-anchor inflation expectations.
- Erosion of Investor Confidence: Long-term bond yields rise due to inflation and policy risk premiums.

IV. Could It Happen Again in the U.S.?

The Fed today enjoys an elevated level of independence, yet recent history suggests this status is vulnerable. During Donald Trump's presidency, he frequently criticized Jerome Powell and considered firing him, which would have required testing legal limits. Meanwhile, proposals like Project 2025—a policy blueprint backed by conservative think tanks—envision greater executive influence over the Fed’s governance structure.
Future administrations, facing high debt, slow growth, or populist demands, may again seek to politicize the Fed to finance expansionary fiscal policy or suppress borrowing costs.
Source: The Heritage Foundation’s Project 2025; Financial Times (2023); New York Times (2020)

V. Conclusion: The Fragile Fortress

History shows that compromising central bank independence yields short-term political gains at the cost of long-term economic pain. From Roosevelt to Nixon, and from Erdoğan to Orbán, the results have been consistent: inflation, currency depreciation, market volatility, and eventual painful corrections.
Preserving the Federal Reserve’s autonomy is essential not just for sound money, but for safeguarding the institutional integrity that underpins modern capitalism. As global challenges mount, it will be vital to ensure that central banks remain bastions of credibility and restraint.

For those who are interested --- Selected Sources and Further Reading

• Federal Reserve History: https://www.federalreservehistory.org/
• Allan H. Meltzer, 'A History of the Federal Reserve' (University of Chicago Press, 2003)
• William L. Silber, 'Volcker: The Triumph of Persistence' (Bloomberg Press, 2012)
• OECD Economic Surveys: Hungary 2023
• IMF Country Reports: Turkey (2022–2023)
• The Heritage Foundation, Project 2025 Policy Agenda
• Financial Times, New York Times, Bloomberg (2020–2024 reporting)

John Vidas

July 2025