In 2025, the independence of the U.S. Federal Reserve is facing unprecedented challenges. With the dust settling after the 2024 election and Trump returning to the White House, tensions between the Federal Reserve and the executive branch have rapidly escalated, and the markets have begun to clearly react to political signals from Washington. In recent months, the U.S. dollar has continued to depreciate, U.S. Treasury yields have experienced significant volatility, and global capital has started to reallocate exposure to dollar assets. This indicates that the storm surrounding monetary policy independence is no longer just a domestic U.S. controversy but a systemic risk affecting global financial stability.

From a historical perspective, the U.S. institutional framework grants the Federal Reserve a high degree of operational autonomy, designed to prevent monetary policy from being influenced by short-term political incentives. However, when the president openly criticizes central bank policies and even hints at possible personnel changes, the market naturally questions the Fed’s decision-making independence. Such doubts affect not only the expected interest rate path but also shake global investors’ fundamental trust in dollar assets.

A recently leaked White House legal memorandum has attracted widespread attention, attempting to reinterpret the legal definition of “malfeasance” for Federal Reserve Board members. This move is seen as a prelude by the executive branch to pave the way for replacing the Fed chair. Wall Street and academia have reacted strongly, fearing that if this direction is established, it will be difficult to prevent further direct political interference in the future. Following the news, the dollar index plummeted, U.S. Treasury yields became more volatile, sounding an alarm for the markets.

What unsettles the market further is that Trump publicly called on the Federal Reserve on social media to “immediately cut interest rates,” naming the current high rates as the main obstacle “crushing the economic recovery.” This statement was immediately reflected in market prices, with the 2-year Treasury yield experiencing rare sharp intraday fluctuations. Traders reassessed the Fed’s upcoming policy outlook and adjusted their interest rate option positions accordingly.

Although inflation data remained basically stable in the first quarter, with the core PCE annual growth rate holding at 2.6%, the White House hopes the Fed will cooperate with its post-election large-scale infrastructure and employment plans by releasing monetary policy space earlier. Most Fed governors still advocate for maintaining the status quo and prioritize long-term inflation expectations stability to avoid repeating the mistakes of the 1970s. The deepening divergence between the two sides has made the market increasingly confused about the policy direction.

From the perspective of international capital flows, the trend of de-dollarization is accelerating. According to recent cross-border payment settlement data, the dollar’s share in global transactions has fallen to a three-year low. As more countries increase gold reserves and raise the weight of the euro and renminbi, the structurally bearish voices on the dollar are no longer just short-term hedging responses but a medium-term assessment of U.S. policy direction and institutional stability.

Technical analysis also supports this view. The dollar index has formed a death cross, indicating the bearish trend may continue; hedge funds and corporate treasury departments have clearly increased their allocation to non-dollar assets. This tidal adjustment is not a short-term emotional fluctuation but a deep reassessment of institutional variables.

The fixed income market has also reacted sharply. U.S. Treasuries, once viewed as a global safe haven cornerstone, have recently shown a high degree of decoupling between prices and inflation expectations. On one hand, yields fluctuate dramatically; on the other, inflation expectations remain uncontrolled, making it difficult for investors to price credit risk and real interest rates effectively. This has led to decreased liquidity in long-term bonds, widened bid-ask spreads, and a clear decline in market efficiency.

The corporate bond market is also showing cracks. Investment-grade bond spreads have widened, while non-investment-grade bonds face continued outflows. The cost of credit default swaps for some high-rated companies has risen rapidly, indicating investors’ doubts about future fiscal policy and overall credit environment. Overall, signals of credit market tightening have begun to emerge.

On the other hand, inflationary pressures are spreading from single commodities to the entire supply chain. The U.S. has imposed additional tariffs on Chinese clean energy products, triggering a chain reaction. Global raw material and agricultural product prices have risen simultaneously, forming a second wave of inflationary pressure. Multilateral trade organizations warn that if major economies continue to adopt protectionist policies, the global inflationary trend may extend into next year.

Although the market expects the Fed to moderately cut rates in the future, wages and prices in the service sector remain sticky. Especially with the decline in labor force participation among older workers, long-term wage pressures remain unresolved, potentially increasing the difficulty for the central bank to manage inflation. Reports from the restaurant and healthcare industries indicate strong pricing power, suggesting core service inflation has yet to show clear signs of weakening.

In such a situation full of policy and institutional uncertainty, investors naturally seek safe havens. Gold has once again become a focus, with open interest reaching multi-year highs; however, its volatility has surged, partly reflecting divergent market views on gold’s hedging effectiveness. Bitcoin also shows signs of decoupling from traditional safe-haven assets, gradually developing its own risk reflection mechanism.

Inflation-linked bonds show a split in the maturity structure. Short-term TIPS demand has risen significantly, but long-term liquidity has deteriorated, indicating the market expects inflation risks to rise over the next few years but holds reservations about longer-term policy credibility.

In the stock market, sector rotation is evident. Mid-cap and small-cap stocks outperform large tech giants, reflecting capital’s growing preference for beneficiaries of domestic demand policies. However, behind this rally, volatility has surged, indicating much of the capital is still short-term momentum chasing. Meanwhile, consumer staples show more stable pricing and profitability, gradually becoming a new choice for conservative funds.

For institutional investors, the geographic and sector distribution of portfolios is rapidly adjusting. Eurasian markets, natural resources, infrastructure, and defensive assets are favored. Sovereign and public funds from Norway, Saudi Arabia, Australia, and Canada send similar signals. Private equity is further focusing on long-term structural changes, such as Japanese real estate, Swiss commercial facilities, and Brazilian agricultural infrastructure, all becoming popular allocation targets.

In the long run, this crisis surrounding the Fed’s independence will have impacts beyond short-term market volatility. If the credibility of major central banks’ policies is impaired, it will not only raise the central level of real interest rates but may also weaken the role of the domestic currency as an international reserve. Systemic increases in international capital costs will bring long-term losses in global production and trade efficiency.

Looking back historically, once central banks lose independence, regaining market trust often requires years or even decades of institutional repair and economic rebuilding. Today’s financial system, under the impact of digitalization and decentralization forces, is more fragile and harder to control than before. Once policy errors occur, the consequences may be comprehensive and structural, unlikely to be remedied by monetary or fiscal measures alone.

Facing the current situation, investors should strengthen risk management strategies and reassess the long-term stability of dollar assets. Gold, short-term TIPS, non-dollar denominated assets, and consumer staples stocks may become relatively safe havens under the future capital market revaluation.