Central Bank Autonomy is Critical for Ensuring Healthy Economies and Financial Markets
By Kamal Malhotra, August 6, 2025
A recent study published in the Harvard Business Review by Roberto Stefan Foa and Rachel Kleinfeld states that “far from growing private-sector wealth, we find that equity returns under right-wing populists often prove dismal.” More specifically they “underperform benchmarks by around a quarter during a first term in office, and by half after a decade.” This is because right-wing populists typically undermine the rule of law and meddle in markets (e.g. Trump’s tariffs). Nobel Prize winning economists Acemoglu, Johnson and Robinson also demonstrated in “Why Nations Fail,” that authoritarian assaults on institutions are associated with lower growth.
President Donald Trump visited the Washington DC headquarters of the US Federal Reserve (the US’ central bank, known as the Fed) on July 25. That visit was at a time of escalating tensions between his Administration and the independent overseer of the US’ monetary policy, whose conduct has significant implications for the rest of the world – and for the US dollar’s (USD’s) future as the world’s reserve currency. This visit came in a context where Trump has repeatedly demanded that Fed Chair Jerome Powell cut US interest rates to close to zero and insisted that inflation will not rise. He has also frequently raised the possibility of firing the Fed Chair (although he has then rolled this threat back every time). He has also repeatedly used highly objectionable language against him. One of the latest slurs directly aimed at Powell by the US President was “numbskull” for Powell’s unwillingness to cut the Fed’s interest rates while, after threatening to fire him recently, the latest timeframe he has given Powell to stay at the Fed is eight months. This is even though the Fed Chair’s current four-year term does not end till May 2026, and his Fed Board term does not expire till 2028.
Unsurprisingly, President Trump sparred with Federal Reserve Chair Powell on July 25 during his Fed visit not just about the costs of the ongoing renovation to the historical building which he has said are tantamount to a “fraud”, wrongly alleging that their cost was about $3.1 billion when it is $2.5 billion. While he backed away from earlier recent statements in which he had suggested he would fire Powell, he demanded that the Fed lower its interest rates by three percentage points to between 1.25-1.5 per cent.
This rare Presidential visit to the Fed took place a week before for a two day interest rate setting meeting at which they expectedly decided to leave the Fed’s benchmark interest rate in the 4.25-4.5 per cent range, where it has been since December 2024, as they sensibly wait to see how the US economy, inflation and employment perform in the face of both the US Administration’s new global tariffs expected to come into effect on August 7, as well as his other economic policies, some of which were just approved in the One Big Beautiful Bill Act (OBBBA). While two of President Trump’s appointees at the meeting voted to cut interest rates at the meeting as President Trump had demanded, and he applauded that, they did so because they saw the economy and employment weakening, not the reasons he wanted to hear. In fact, early in August he fired the Head of the Federal Bureau of Labour Statistics because he did not like the low employment numbers announced for July by her, and liked even less the significant downward revisions to the employment numbers for May and June which she also announced.
With the US’ economic growth rate for the for the first half of 2025 being the lowest for a long time, the very tepid employment growth between May and June, and with inflation edging up by over 2% in June, the US appears to be headed for what economist call stagflation i.e. low, declining economic growth coupled with high and growing inflation. This was last seen in the US in the 1970s at the time of the Organization for Petroleum Exporting Countries (OPEC) oil price shock. While the full impact of this may only be felt later in 2005 and into 2026, a mid-term election year, the Fed has its hands full and will have major dilemmas about what to do about the repo interest rate at its forthcoming September meeting and in subsequent meetings over the next 12-month period. This is because of the twin responsibilities it has, of ensuring price stability (low inflation) while optimizing economic growth and ensuring high employment.
Central banks, in economically advanced countries as well as in developing countries, play a crucial role in maintaining economic stability and promoting economic growth, even though their specific roles and priorities differ, depending on a country’s stage of economic development. What they all do is manage monetary policy, oversee the banking system and act as a lender of last resort. Central banks in all countries must balance price stability, economic growth and employment objectives.
The independence and integrity of any central bank is vital for the effective performance of all these functions. In the case of the US, the Fed’s independence and integrity is also vital for the health of the global economy and global financial markets given the US economy’s still dominant influence in both. The Fed’s periodic interest rate announcements serve as particularly important signals for Wall Street and for the Treasury bond market, directly impacting the value of the US dollar and its role as the world’s reserve currency.
What is particularly perturbing at this time is not just Trump’s attacks on Powell, whom ironically, he appointed during Trump 1.0 expecting loyalty, but, as Gillian Tett pointed out in a recent opinion piece in London’s Financial Times, Trump and some of his loyalists want to “smash” the Fed’s independence. The recent surprise resignation of one of the Fed Governor’s six months before the end of her term, allows him to appoint a blind loyalist to this position at this critical time, just as he thought he did to the US Supreme Court during Trump 1.0, and he has certainly done to both the Appeals Court recently and to his Cabinet.
Once marginal, but now increasingly influential US right-wingers like Curtis Yarvin, the “self-styled populist authoritarian” want him to go much further. They are advising Trump and his relevant loyalist senior colleagues to merge the Fed with the US Treasury, effectively placing the former under the latter. They also want the Treasury to restructure the US’ current $36.2 trillion debt and “unplug” it from the rest of the world’s financial system. Yarvin wants a revaluation of US debt and other assets and says, “it is very incorrect to regard Treasury obligations as debt—they are restricted stock.”
Most economists rightly consider this crazy, but many senior Trump 2.0 officials now follow Yarvin whose ideas are apparently also being cited approvingly by US Vice President JD Vance. and there is speculation that if Trump does, indeed, fire Powell, he will appoint Scott Bessent, his Treasury Secretary, to oversee both institutions.
It is worth considering similar assaults and their implications and impact in other countries. Let me take two examples, Turkiye and India
The first case study: Türkiye’s Central Bank:
It is worthwhile, in this context, to consider Turkiye’s central bank experience over the last decade, after President Erdogan more stridently and repeatedly increased his similar long-standing assertions about lowering the central bank’s interest rates despite high inflation, thereby seeking to invert the standard economic textbook relationship between inflation and interest rates. The results of President Erdogan’s assertions are plain to see: serious and possibly worsening political economy consequences for both Turkiye’s domestic economy and its role in West Asia and around the globe.
There are many differences between the political economies of the US and Turkiye. For one, the US economy’s influence is global while Turkiye’s is now barely regional. For another, the USD is the world’s reserve currency, and the Turkish Lira (TL) clearly is not. Nevertheless, there are important lessons to be learnt, by the US as well as by other emerging BRICS economies such as India, from the Turkish government’s repeated and prolonged political interferences in the functioning of the country’s central bank.
Even as recently as 2013, when the Turkish Central Bank Governor was Erdem Basci, before he started to come under severe political pressure from President Erdogan (facing similar slurs and pressures which President Trump is currently hurling at Fed Chair Powell), Turkiye’s Central Bank was regarded as one of the best in the advanced economy 38-member OECD (Organization for Economic Cooperation and Development ). In the decade since then, Turkey has clearly become amongst its worst performers, simultaneously also losing its hard-won earlier reputation. In fact, the Turkish Central Bank has been struggling to regain its credibility over the last two years even after Erdogan was forced to return to the high road of mainstream economic thought. Sadly, it is likely that both the Bank’s effectiveness and its reputation will continue to suffer for a long time to come.
While the US economy’s inflation rate thus far has been manageable, having reduced significantly during the Biden Administration’s last year in office, the US Consumer Price Index rose 2.7% in June 2025 from a year earlier, as the global trade war began to bite. Almost every serious economist’s view is that this is only the beginning, with much higher US inflation, lower economic growth, employment and even stagflation more or less inevitable before the end of the year, especially if Trump’s threatened tariffs come into effect on August 7.
Similarly, in Turkiye, economic lunacy has created an unnecessarily huge economic burden for the country for at least the next decade. Erdogan’s stubborn insistence on populist economic policies kept Central Bank interest rates very low for years despite high inflation, declining foreign exchange reserves, and of course significant declines in the value of the Turkish Lira (TL).
Erdogan insisted, against economic orthodoxy, that high interest rates were “the mother of all evil” and the cause of high inflation. He pushed the Central Bank Governor to lower rates as the way to cool inflation, just as President Trump is currently doing in trying to push Fed Chair Powell to pre-empt the higher inflation which everyone can see is coming.
It was the cumulative results of hyperinflation and its nosediving currency which forced Türkiye to the economic wall for close to a decade, finally forcing President Erdogan to agree to an embarrassing U-turn on the country’s central bank interest rates in June 2023. The Turkish Central Bank has returned to economic orthodoxy since then and was forced to hike interest rates by a mind-boggling 40% to 50%.
On July 24, 2025, more than two years later, interest rates have remained stubbornly high at 43%, despite a rate cut on that day of three percentage points from 46%. This has been the first rate cut since April, when the Central Bank was forced to increase its interest rate after the politically motivated arrest of Istanbul Mayor Imamoglu which sent the TL tumbling to a record low against the USD (40.96 to the USD). It has recovered only slightly since then to 40.55 as of July 25, 2025.
The 2023 rate increases did not make a dent on price and wage inflation which remained at 67% over the next twelve months, only slightly lower than its peak of 85.5% in October 2022. While inflation in Turkiye has been steadily declining since then, it still sat at 35.05% on July 25, 2025.
High interest rates have clearly failed to stabilize the currency. The TL at 40.55 to the USD in late July 2025 has fallen more than 50% since the start of 2024 when it was slightly under 30 TL to the US dollar (it was slightly more than 35 TL to the USD on December 31, 2024) having depreciated significantly from 10 TL to the US dollar in September 2021 and a little over 3.5 TL to the US dollar at the end of 2016, down from around 0.78 to the USD in April 2013.
As a result of inflation, minimum wages had to be increased by 49% before the March 2024 local elections, threatening a wage price spiral. The sad state of the economy was clearly a major reason for the defeat of President Erdogan and his ruling Adalet ve Kalkinma Partisi (AKP) in the March 31, 2024, local elections.
Türkiye still refuses to turn to the International Turkiye Monetary Fund (IMF) for an economic stabilization program since this would be politically very difficult for President Erdogan given his past vocal oppositions to any dealings with it. The population, therefore, continues to deal with a greater degree of pain over a protracted time frame then would have otherwise been the case as the Minister of Treasury and Finance, Mehmet Simsek, tries to stabilize and grow the economy without IMF support.
Despite its return to economic orthodoxy since mid-2023, Turkiye’s Central Bank remains anything but independent as evidenced by Erdogan’s firing of numerous Central Bank Governors since 2013 from when there have been six Central Bank Governors. Naci Agbal lasted less than five months (November 7, 2020-March 20,2021). The current Governor, Fatih Karahan, has been in office less than 18 months, starting February 2024.
The second case study: The Reserve Bank of India
Tensions between the Reserve Bank of India (RBI—India’s central bank) inflation stabilization and longer-term economic stability priorities and the Government’s economic growth priorities are not new – and they continue. D Subbarao, Reserve Bank of India Governor (2008-2013) frequently clashed with repeated Finance Ministers over the RBIs anti-inflation stance, which was perceived by the Government of India then as a barrier to economic growth.
Even as recently as December 2024, barely a week before his retirement, despite BJP government pressure to address GDP slowdown, their own closely allied RBI Governor, Shaktikanta Das (2018-2024) who oversaw and implemented many other government induced policies like demonetisation ( for which he was subsequently rewarded with the position of Principal Secretary II in the Prime Minister’s Office, his current position from February 2025), resisted cutting the repo rate from 6.5% to control inflation.
Governor Subbarao, under the Congress Party led government, also opposed the formation of the Financial Stability and Development Council (FSDC), arguing it undermined the RBI’s role in maintaining financial stability
What has most undermined the RBIs authority and autonomy in the last decade, however, was when the government ignored the advice of the then Reserve Bank of India Governor, the world-renowned economist and a previous IMF Chief Economist and Research Director (2003-2006), Dr Raghuram Rajan. He advised the Government of India against demonetization in 2016, but Prime Minister Modi went ahead with it, with serious negative consequences for Indian society, especially for the country’s economic growth – -and its most vulnerable population groups.
Dr. Rajan, former RBI Governor (2013-16), when consulted while still in that position, had emphasized the significant short-term economic costs associated with demonetization, particularly the slowdown of GDP growth. He had also pointed out that the proposed demonetization exercise was not adequately planned, especially in terms of ensuring a smooth and timely replacement of the demonetized currency. Further, he had felt that its full potential impacts had not been adequately measured and that there were other means to achieve its avowed objectives of rooting out illegal “black” money.
Dr Rajan also strongly defended the RBI’s autonomy, (he famously emphasized the RBIs ability to say “No”), resisted demonetization and the government’s moves to shift money market regulation to the Securities and Exchange Board of India (SEBI). Alas, his recommendations were not accepted by the Modi government, and he was pushed out, with his term ending shortly before demonetization began, overseen not by the RBI but by Shaktikanta Das, then Economic Affairs Secretary, Ministry of Finance. It is worth noting that though Das is not an economist, he was later made RBI Governor from 2018-2024, just after the relationship between the Government and the RBI was at an all-time low after the resignation of the previous RBI Governor, Dr Patel (who succeeded Dr Rajan) had also left, having effectively been pushed out.
Demonetization was implemented on 8 November 2016 (86% of India’s currency was nullified overnight to clean out “black money and counterfeit notes”, objectives that are still unachieved) with horrendous consequences for both economic growth and the lives of citizens.
In India, the surprise demonetization of large Rupee banknotes with no advance notice and no alternatives literally shortchanged approximately 90% of the population, may without bank accounts, as well as many micro, small and medium enterprises (MSMEs) largely reliant on the cash economy. It has certainly done long-term structural damage to the Indian economy, from which it is yet to fully recover. But demonetization has probably been only the worst of the government’s mistakes, several of which have had severe economic consequences in the last decade.
Urjit Patel (2016-2018), Dr Rajan’s successor, resisted the government’s attempt to tap into the RBIs excess reserves, leading to escalating tensions. The government wanted to use foreign exchange reserves to finance its fiscal deficits and use them for loan write-offs which he resisted, fearing this could undermine financial stability and lending norms and weaken the Rupee. That disagreement with the Government about reserves management led to Patel’s resignation amid increasing government pressure and escalating tensions between him and the Government, particularly regarding the government’s attempts to access the RBIs capital reserves, notably after the Government invoked Section 7 of the RBI Act of 1934 which gives it the power to direct the RBI on matters which it regards as in the “public interest.”
Recurrent themes and continuing sources of tension between the RBI and the Government in India, especially over the last decade since Mr. Modi became Prime Minister are:
– the autonomy of the central bank
-, government interference in RBI appointments (how the Governor and other senior RBI staff are appointed and the independence of this process),
– -interest rate policies,
– regulatory jurisdiction (e.g., FSDC vs. SEBI vs. RBI role),
– use of foreign exchange reserves and surpluses, (e.g., disputes over how foreign exchange reserves should be used,
– government demands for higher dividends surpluses from RBI income earned from bonds (such surpluses are retained for several reasons, including buffers like the Contingency Fund and Asset Reserve which the RBI is reluctant to deplete because of inflation risks and threats to macroeconomic stability), and
– divergent priorities (Government short-term political considerations versus the RBIs priority of ensuring long-term economic stability).
The RBIs role is to vigilantly guard its autonomy and key priorities – and, whenever either or both are in danger, to say “No”.
It is still too early to tell whether the relatively new RBI Governor, appointed earlier this year, will guard these as fiercely as Dr Rajan did. The reduction of the RBI repo interest rates has been a constant pressure from the BJP government since he joined and he obliged twice in the first half of 2025, by reducing it a full percentage point to 5.5 percent, ignoring or downplaying the huge uncertainty which has been caused by Trump 2.0 tariff and other polices since early April. While he was aided by reducing food inflation because of a good monsoon, this was not a good omen, if it was done under pressure or agreed beforehand. That is hard to definitely judge.
However, the August 6 decision of the RBIs Monetary Policy Committee, headed by the Governor, to not lower the repo interest rate further despite its reduced inflation forecast of 3.1% for this fiscal year is reassuring. This is particularly so, given that 25% tariffs across the board will come into effect on all Indian exports from August 7. To add fuel to the fire, President Trump, on August 6 threatened India with an additional 25% tariffs—making for a total of 50% across the board— to come into effect by August 27 as punishment for its purchase of Russian oil and defence equipment, accusing it of fuelling Russia’s Ukraine killings through Russian revenue which has resulted from this continuing sales to India.
President Trump has also repeatedly promised high US import tariffs on Apple iPhones made overseas, singling out India, as well as on pharmaceuticals, both of which figure significantly in India’s exports to the US, in both quantity and value terms.
Some Key Overall Lessons for Both Economically Advanced and Developing Countries
Populist leaders do more long-term structural damage to the economy the longer they stay in power. This has certainly been the case in Turkiye over Erdogan’s 23 years in power and is also increasingly the case in India over Modi’s 11 years as Prime Minister.
Will something similar, if not identical, be the fate of the US economy and financial markets under Trump 2.0 given his repeated and continuing assaults on the Fed’s independence and integrity? Only time will tell. We must hope President Trump fails in such efforts, not just for the sake of the US domestic economy, but for the economic health and integrity of the global economy.
The article (above) is included here by kind permission of author Mr Kamal Malhotra; originally published by the Turkish organisation TEPAV