J. Safra Sarasin: Central Bank Independence Under Pressure
7 NOV, 2025
By Raphael Olszyna-Marzys, International Economist at J. Safra Sarasin
Central bank independence has supported macroeconomic stability for most of the past forty years. Economists have long shown that it keeps inflation lower and more stable without harming growth. Over the years, both advanced and emerging economies have strengthened legal safeguards to keep politics out of monetary policy.
However, legal protections do not make central banks immune to pressure. Politicians almost always want lower interest rates. Turkey is a textbook example. It scores well on formal independence, yet President Erdogan spent years pressuring the central bank to cut rates ahead of his re-election, fueling inflation. The United States is now facing similar limits. President Trump pressured the Federal Reserve more than any president since Nixon. His attempt to dismiss Governor Cook — widely viewed as illegitimate — represents one of the most serious threats to the Fed’s de facto independence in fifty years. The upcoming Supreme Court ruling on that dismissal will reveal whether America’s institutional safeguards still hold. Any unclear decision that fails to limit presidential power could undermine confidence in the Fed’s autonomy.
The deeper concern is that this may not be an isolated case. The rise of populism, growing deficits and public debt, and increasingly frequent negative supply shocks could all lead to more political interference, not less. Financial markets will play a crucial role in countering this trend — though they may not always succeed.
Central banks are not entirely sovereign. Their goals — typically price stability and, in the case of the U.S., maximum employment — are set by parliaments or treaties. Still, central banks usually define these goals in practice and decide how to pursue them, later justifying their actions to legislators through frequent hearings.
Independence is generally defined along four dimensions: goal independence (defining “price stability,” often as a 2% inflation target); instrument independence (choosing the tools of monetary policy such as interest rates and balance sheet operations); financial independence (controlling their own budgets and generating income through seigniorage to stay insulated from fiscal policy); and personal independence (protecting officials from arbitrary dismissal).
Economists have turned these features into indices of legal independence. The most cited, developed by Alex Cukierman (1992) and later expanded by Garriga, Romelli, and Adrian, assigns central banks a score between 0 and 1, based on six sub-indicators aggregating responses to a range of questions. Over time, these scores have increased in both advanced and emerging economies.
However, numbers can be misleading. The Federal Reserve scores lower than most major central banks, largely because it lacks a single price-stability mandate — instead, it has a dual mandate that can create trade-offs when its two goals conflict, as they do now. Unlike the European Central Bank, the Fed does not operate under an unassailable legal framework preventing executive influence over its Board of Governors. In general, the Fed functions within a more flexible legal system. The fact that Turkey’s or China’s central bank might score higher than the Fed says more about legal formality than political reality.
Effective independence depends as much on reputation, credibility, and political norms as on statutes. These are harder to measure but can be inferred from governor turnover rates, inflation expectations, exchange rates, and term premiums. Emerging market central banks have made progress since the 1990s: illegal dismissals have declined, and inflation expectations have stabilized. This helped them support their economies during the pandemic. The Fed, too, has long enjoyed strong de facto independence, bolstered after it fought inflation in the 1970s when President Nixon pressured Chairman Arthur Burns to lower rates to aid his re-election.
When independence is not deeply rooted in law, political norms — such as the executive refraining from commenting on monetary policy, and central banks staying out of fiscal debates — become crucial, but they can be violated. During Trump’s first term, his relentless Twitter attacks on the Fed affected markets. Research by Bianchi et al. found that his public pressure lowered expectations for future rates, possibly influencing the Fed itself. In his second term, Trump intensified his actions, using executive power and legal loopholes to discredit and replace board members with loyalists. The slight rise in long-term inflation expectations since his re-election suggests an erosion of trust.
Three factors could heighten pressure on central banks, particularly those in advanced economies with weaker legal independence — such as the Bank of Japan, the Bank of England, and the Federal Reserve.
- Populism. While all governments tend to prefer lower rates, populists are more likely to attack central banks openly, consistent with their strategy of opposing technocrats “in the name of the people.” A recent study by Gavin and Manger shows that populist leaders are more likely to win concessions on interest rates, although financial markets can help limit such demands.
- Fiscal dominance. Historically high public debt and large deficits make inflation politically tempting. Aging populations, rising defense spending, and climate-related costs will put further strain on budgets. History shows that when fiscal pressures mount, governments often lean on central banks to escape crises via inflation or financial repression to keep interest payments low.
- Negative supply shocks. The world is shifting from an era of abundant supply to one of frequent disruptions — climate shocks, geopolitical fragmentation, and energy insecurity. These shocks push prices up but slow growth. Central banks cannot fix them, yet they bear the political consequences, weakening their legitimacy and exposing them to more interference.
Financial markets can serve as an important safeguard. Moreover, central banks like the ECB, with clear mandates, strong legal protection, and deep credibility, are harder to influence. Still, no central bank operates in a political vacuum. One of the cornerstones of modern economic policy may nonetheless be at risk.
