The Fed sheds one of its three big threats

At the beginning of the year, concerns about the threats to the central bank in 2025 were high among Fed watchers: the possibility of Donald Trump imposing stagflationary tariffs, executing an inflationary fiscal policy, and undermining the independence of the Federal Reserve.

He managed to do all of the above.

However, last Thursday, the US Supreme Court largely eliminated one of the threats looming over the Fed. In an emergency ruling, the majority of the court decided to keep Gwynne Wilcox out of her former position at the National Labor Relations Board, from which she was unjustly fired by Trump in January, while the case proceeds through the lower courts.

The Supreme Court also hinted at the possibility of overturning 90 years of precedent by deeming it unconstitutional for Congress to create positions on similar boards where officials are shielded from dismissal, except in cases of serious misconduct.

While this initially seemed concerning for the Fed’s governors who have the same protections mandated by Congress, the Supreme Court’s majority took a sudden shift in its reasoning. Despite the identical protections, they argued that US central bankers are employed by “a uniquely structured, quasi-private entity,” hence different rules will apply. This decision favored Jay Powell and other Fed governors while leaving Wilcox and other public officials dismissed by Trump in a precarious position.

Although the ruling lacked logical coherence, as pointed out by Lev Menand at Columbia Law School and the three dissenting justices, the majority’s decision prevailed.

Powell’s position is secure, while other US officials remain vulnerable.

Following his newfound security, Powell delivered a bold speech echoing the sentiment of the UK’s first world war recruitment poster, urging Princeton graduates to defend US democracy amidst attacks on American universities by the administration.

Two out of three risks remain

While Fed officials’ positions are safe, their reputations are still tied to how they address the tariff and budgetary challenges facing the US economy. Market expectations regarding future Fed monetary policy have shifted over the past month, with a growing realization that the Fed may adopt a wait-and-see approach before adjusting interest rates.

The FT’s Monetary Policy Radar has maintained a scenario with no US rate cuts in 2025 since April, with the risks of a significant policy loosening also being considered.

Insights into UK inflation

Recent UK inflation figures for April presented challenges for the Bank of England, with headline inflation surpassing expectations due to various factors including energy prices, tax increases, and seasonal effects.

While inflation rose, a closer look reveals that the increase was driven by one-off factors, indicating that April’s inflationary spike may not be as severe as initially perceived.

The debate within the Monetary Policy Committee regarding the nature of the disinflation slowdown continues, with differing views on whether it signals a deeper issue or a temporary pause.

Recent Developments and Analysis

Central banks worldwide are facing challenges in maintaining inflation control, with countries that experienced high inflation in the past showing a tendency towards elevated inflation rates in recent times. This poses a credibility issue for central banks and could impact future policy decisions.

Central Banks is edited by Harvey Nriapia