Global Macro Research
Global Macro ResearchShould markets fear fiscal dominance?
Authors
Paul Diggle
Chief Economist
Luke Bartholomew
Deputy Chief Economist
Duur: 40 mins
Date: 10 sep 2025
The independence of the US Federal Reserve is under sustained attack from Donald Trump’s administration. But despite the totemic significance of the Fed to the global financial system, markets so far seem relatively sanguine.
Luke and Paul discuss the history of independent central banks, why they matter so much to the economy and what the journey to full ‘fiscal dominance’ might look like.
They also talk to Aaron Rock and Max Macmillan, senior fixed income and macro investors at Aberdeen, about how they think about monetary policy independence and whether markets should be more worried about this assault on monetary policy autonomy.
Some highlights:
- Political pressure, muted market reaction. Despite explicit threats to the Fed’s independence, markets have so far responded calmly. Aberdeen fund managers suggest that, for now, easier monetary policy is being welcomed – think weaker dollar, higher equities and steeper rate curves. But if independence erodes further, the risk is a cycle of rising inflation and higher long-term interest rates.
- Why independence matters. An independent central bank anchors inflation expectations and keeps borrowing costs stable. When monetary policy is set by technocrats rather than politicians, investors can trust that decisions are made for economic – not electoral – reasons.
- Lessons from history. The episode traces the evolution of central bank independence, from the inflationary 1970s to the present. The Fed’s recent move away from ‘average inflation targeting’ back to a traditional 2% target is also unpacked, with experts debating what this means for policy credibility.
- Fiscal dominance: a slippery slope? The risk isn’t just a sudden break with the past, but a gradual erosion of independence. Lower rates may boost growth and markets in the short term, but over time could fuel inflation and undermine the very stability policymakers seek to protect.
Listen to the latest episode of our Macro Bytes podcast for the full discussion.
