The End of Independence – How Political Power Is Rewriting Monetary Policy

Read the market analysis and fund positioning

Major paradigm shifts rarely materialize through dramatic events. More often, institutional norms quietly shift. The Federal Reserve is currently experiencing exactly this evolution. What began as sporadic political influence has evolved into a systemic question regarding the balance of monetary power. The question is no longer if the system will change, but how quickly — and with what implications for the capital markets. The markets are already pricing in this change – long before it is openly articulated.

Macro: The Power Struggle Reaches Its Climax

We are in January 2026. The power struggle between the Aministration and the Central Bank is in full swing and entering its decisive phase. The Federal Funds Rate stands at 3.50–3.75%, following moderate cuts of 25 basis points (bps) each by the Fed in October and December of the previous year.

Yet, behind these sobering figures lies an institutional conflict that extends far beyond the current interest rate level. While the Executive is pushing for further easing – to support the economy, employment, and not least the sustainability of public finances – the Fed is attempting to defend its monetary policy independence and its mandate of credibility. The core issue is not a single decision, but rather the question of who will ultimately set the course for American monetary policy: the Central Bank or the Administration.

Later this month, the Supreme Court will rule on the tenure of Lisa Cook on the Fed's Board of Governors – a decision that significantly affects the Central Bank's institutional scope of action. In parallel, President Trump has specified his monetary strategy: Treasury Secretary Scott Bessent has narrowed the list of candidates to succeed Powell to five individuals – Waller, Bowman, Hassett, Warsh, and Rieder.

Despite their varying profiles, they share a common stance: the conviction that a durably lower interest rate level is necessary, both in terms of cyclical economic policy and fiscal sustainability. This is not just about growth and employment, but also about relieving a highly indebted government sector – a point that is increasingly blurring the line between monetary and fiscal policy.

A central figure is Stephen Miran, Trump's designated representative on the Fed Board since September 2025 and the first member in the central bank's 111-year history to simultaneously belong to the Executive Branch. Miran is exemplary of the new type of politically embedded Fed Governor. As early as March 2024, he argued in an article for the Manhattan Institute that the Fed's independence is overstated and economically overrated. In September, he voted for a 50 basis point (bps) rate cut – double the majority decision. His goal is ambitious: a Federal Funds Rate of 2.0–2.5% by year-end – roughly 150 basis points below the current level.

Thus, the conflict between monetary autonomy and political calculation enters its decisive phase. The coming weeks will reveal whether the Fed continues to be perceived as an independent institution – or whether it de facto transitions into the strategic agenda of the Executive Branch.

The Anatomy of Institutional Capture

Trump's approach follows a clear pattern, one he has previously applied to other independent agencies. He is not changing the formal rules, but rather the operational logic of the institution – step by step.

Phase 1: Public Pressure.
Since early 2025, Trump has systematically attacked Fed Chair Jerome Powell via social media and public appearances. The accusation: Powell is acting "too late" and is thereby harming the economy. The goal of this attack is not just delegitimization, but the shifting of expectation horizons – the Fed should no longer appear as a neutral authority, but as a politically accountable actor.

Phase 2: Exploitation of Legal Gray Areas.
The case regarding the attempted dismissal of Lisa Cook marks a precedent. Cook is accused of having provided false information on mortgage applications. The message is clear: no seat on the Board is secure if it contradicts the Executive line. This climate of threat creates room for maneuver without the need to change formal rules.

Phase 3: The "Shadow Chair."
A successor to Powell could be nominated as early as February 2026 – months before his term officially ends. Treasury Secretary Scott Bessent summarized it in 2024: "Once a Shadow Chair is nominated, no one will pay attention to what Jerome Powell says." Monetary policy communication effectively shifts to the designated successor.

Phase 4: Securing the Majority.
With Stephen Miran, a loyal representative of the Executive is already on the Board. Should Cook be removed, there would be two. And with Powell’s replacement in May 2026, a stable majority would emerge. Thus, control over the Federal Funds Rate would no longer rest with an independent central bank, but with a politically defined coalition within the Board.

What is visible here is not a dispute over individual rate moves, but the systematic reconfiguration of monetary policy decision-making architecture.

The Market as an Collaborator

Remarkably, the capital markets are not slowing down this process, but accelerating it. The fed funds futures strip, which reflects the market's expected interest rate path, points to further easing of 75 to 100 basis points (bps) by the end of 2026 – aligning with the Administration's objectives. The market logic is simple: Lower interest rates increase valuation multiples, reduce refinancing costs, and weaken the dollar. These very effects correspond precisely to Trump’s explicitly stated economic policy preferences. However, this dynamic alters the institutional decision-making environment: When markets anticipate that political influence is effective, the expectation pressure for further intervention rises. Confidence in monetary policy independence is not just weakened by this – it becomes an endogenous risk within the financial system.

Inflation Risk – and the New Deflationary Force

While the erosion of monetary independence historically signals a clear inflation risk, a structurally deflationary force of extraordinary magnitude simultaneously comes to the fore: the rapid and profound diffusion of generative AI into business processes. Unlike previous waves of automation, this productivity surge affects not only manufacturing and logistics, but also high-skilled activities in research, design, legal services, healthcare, and financial analysis. The result is a broad-based reduction in marginal costs, an acceleration of output cycles, and a decline in the bargaining power of labor in knowledge-intensive sectors. In the short term, tariffs, re-industrialization programs, and politically driven easing are inflationary. However, in the medium term, AI-driven efficiency gains superimpose these impulses: production costs fall, margins stabilize despite lower prices, and wage pressure subsides. In this constellation, the classic Taylor Rule loses its predictive power. Nominal inflation rates may remain elevated while structural price dynamics have already turned downward – an environment where monetary policy signals can be systematically misinterpreted.

Implications for Investors

For investors, a base case scenario with a high probability emerges: monetary easing under political guidance. Should the Supreme Court confirm Lisa Cook's removal in March 2026, and the Administration name a "Shadow Chair" as early as February, the institutional pressure on Jerome Powell would be so great that a resignation before the end of his term becomes realistic. A loyal successor would likely implement the Miran agenda: a reduction of the Fed Funds Rate to around 2.25% by year-end, flanked by the possible resumption of quantitative easing to prevent long-end yield spikes. The yield curve would deliberately flatten, while falling nominal yields support both bond and equity markets. Simultaneously, inflation concerns lose relevance. Tariff-related price impulses remain isolated, while AI-driven efficiency gains strengthen the supply side and reduce long-term inflation expectations, causing real interest rates to fall. Under these conditions, ten-year Treasuries could trend toward 3.0% or lower – a setting characterized by the rare simultaneous occurrence of rising bond and equity prices. The dollar is also likely to moderately depreciate, supported by the political focus on export competitiveness and global market share.

Conclusion: Between Opportunism and Efficiency

Whether the American system of checks and balances will withstand the political pressure remains an open question. However, the dynamic is clear: monetary policy is increasingly being viewed as an instrument of economic steering, rather than an independent stability authority.

Should Trump's strategy succeed, a short-term "Goldilocks" scenario would emerge – low interest rates, rising markets, moderate inflation. Unlike previous cycles, however, this equilibrium would not be credit-driven, but rather supported by productivity gains from technological disruption.

The probability of the key interest rate falling into the 2.0–2.5% range by the end of 2026 is high. Crucially, any potential rise in yields would need to be contained by reactivating Quantitative Easing (QE) policy. For investors, this implies a clear positioning aligned with structural disinflation that overrides short-term inflationary effects. Thus, Artificial Intelligence gains not only technological but macroeconomic significance: it alters the production function – and consequently the decision-making logic of monetary policy.

This monetary policy reaction function describes how the Fed sets its rates in relation to inflation, growth, and the labor market. However, when structural productivity effects from AI change price dynamics, this rule loses its point of reference. The silent revolution in monetary policy has thus begun. It is changing not only the rules of the market, but also the understanding of efficiency, risk, and the balance of power – ushering in a new era of "guided independence."