A Century of Pressure and Pushback

In Washington, few institutions claim independence as fiercely as the Federal Reserve. Its marble headquarters, set apart from Capitol Hill, was meant to embody a principle: that monetary policy should be shielded from the whiplash of electoral politics. But history tells a more complicated story. Time and again, sometimes quietly, sometimes brazenly, presidents have tried to bend the Fed to their will. Each time, markets learned the same lesson: central bank independence is fragile and the cost of compromise is steep.

A Bank Born Political

When Congress created the Federal Reserve in 1913, it wasn’t the insulated technocracy it is, or represents itself as, today. In its early years, the board met in the US Treasury Building, underscoring how closely the new central bank’s operations sat alongside fiscal power.

War financing then made the ties explicit. In World War I, the Fed helped the Treasury sell war bonds and extended credit at preferential rates to support the effort. During World War II, the Fed went further, pegging interest rates, from 3/8% on Treasury bills to 2½% on long bonds, to suppress borrowing costs. That regime ended with the 1951 Treasury-Fed Accord^[1], which “liberated” monetary policy from debt management and laid the foundation for modern independence.

The Nixon-Burns Affair

By the 1970s, that standard was tested like never before. President Richard Nixon leaned on Fed Chair Arthur Burns, his appointee, to keep money loose ahead of the 1972 election. The Nixon tapes document direct presidential pressure for easier policy. Whether Burns’ choices reflected submission to the White House or his own judgment remains debated, but the outcome is not: inflation surged and credibility eroded^[2].

Volcker’s Shock Therapy

It took Paul Volcker (appointed in 1979) to restore credibility. Volcker allowed the federal funds rate to approach 20% in 1980-81, accepting deep recession risks to break inflation’s grip and reassert the Fed’s autonomy. The politics were rough and criticism came from both parties, but the precedent was lasting: the Fed could act independently, even when it hurt, to stabilize the economy. By the mid-1980s, inflation had fallen from double digits to near 4%, cementing Volcker’s campaign as one of the most consequential policy shifts in modern US economic history^[3].

Constant Pressure as… a Constant

But independence has never been absolute. Harry Truman’s administration fought with the Fed over postwar rate pegs, culminating in the 1951 Accord. In 1965, Lyndon Johnson famously hauled Fed Chair William McChesney Martin to his Texas ranch after an unwanted rate hike in an episode long cited as a dramatic challenge to the Fed’s autonomy^[4].

Even during the Reagan years (Volcker stayed on through 1987) tensions surfaced over high rates and deficits; Reagan ultimately reappointed Volcker in 1983, signaling public support amid private friction.

Over the years, the pattern has become clear: presidents routinely want lower rates and faster growth now; the Fed’s job is to say “no” when the long term demands it.

Because History Rhymes

In 2025, the fight over independence is again front-page news. President Donald Trump has pushed for rapid rate cuts, going further by attempting to remove Fed Governor Lisa Cook. This triggered a legal battle with no modern precedent; no Fed board member has ever been removed mid-term.

At the same time, the White House fired the Bureau of Labor Statistics (BLS) Commissioner Erika McEntarfer following large jobs-data revisions, naming an interim chief and stoking concern that official statistics are being politicized. When the integrity of the data itself is questioned, the Fed’s policy signals, and the market’s trust in them, are harder to read.

What makes this moment different is not simply the pressure, which has always existed, but the structural shift it represents. Credibleresearch shows that once a central bank is viewed as an extension of the executive branch, markets begin to price policy not on economic fundamentals but on political incentives. Yields move for reasons unrelated to inflation or employment. Currency volatility rises, risk premiums widen, and in extreme cases, the boundary between monetary policy and political demand collapses altogether.

The United States is nowhere near that point. But this is how governance risks begin: gradually, and then all at once. And this is where the “G” in ESG becomes unexpectedly relevant.

Governance risk is often discussed in the context of corporate boards, in terms of misaligned incentives, weak oversight, and overly concentrated decision-making. But the concept applies equally to sovereign institutions to which the operations of such entities are tied. The Fed’s independence, like any good governance structure, rests on checks and balances: long, staggered terms, data transparency, a clear statutory mandate, and the separation of short-term politics from long-term economic stewardship.

When those checks are challenged via attempts at mid-term removal, politicization of data agencies, or public pressure campaigns, the governance framework itself becomes the risk.

Investors increasingly evaluate governance quality as a leading indicator of resilience. A central bank that cannot rely on credible data, or is vulnerable to executive intervention, introduces exactly the kind of governance instability that ESG frameworks are designed to flag. And unlike most governance failures, which unfold inside a single firm, a governance failure at the Fed transmits across the entire financial system.

This is not about who occupies the White House. It is about whether the United States retains the governance structures that allow its currency, debt, and markets the investment premiums befitting a presumption of stability.

If the presidency succeeds in narrowing the Fed’s policy autonomy, the institution will inevitably shorten its time horizon. A Fed looking over its shoulder will tend to tighten too late and ease too early (the classic signature of governance failure). That dynamic is what drove the inflationary spiral of the 1970s and what Volcker had to confront at extraordinary economic cost.

There is also the risk of precedent. Once one administration asserts the right to reshape the board mid-term, the next administration will be tempted to push further. Governance pressure rarely reverses itself; it escalates. As former Vice Chair Alan Blinder has written, “Central bank independence is a fragile equilibrium.” Once disturbed, it is hard to restore.

And globally, the stakes are enormous. The dollar’s reserve currency status rests in part on the perception, earned over decades, that US institutions are governed with a degree of independence rare among major economies. Undermining that perception raises the cost of capital for the Treasury, makes US assets more volatile in periods of political stress, and forces foreign central banks to introduce political-risk adjustments to US exposure.

In short, today’s struggle is not just a policy fight. It is a governance test, and one that determines whether the institutional architecture built over a century can still protect the Fed’s independence under a new kind of political pressure.

The Lesson for Today

The Fed may be designed to stand above politics. But politics has always tried to climb the marble steps.

From its birth in the Treasury building to Nixon’s tapes and beyond, the lesson remains steady: independence is never permanent; it must be defended. When politics dictate money, inflation risk rises, currencies stumble, and investors re-price uncertainty. But when the Fed holds the line, credibility, albeit generally slowly, inevitably returns.

Timeline

1913 – Creation of the Federal Reserve

• Fed established by Congress, meetings held inside the US Treasury Building.
• Operated closely with Treasury; independence not yet defined.
• Role: stabilize credit, support government financing.
  
  

1917-1945 – War Financing

• World War I: Fed helps sell Liberty Bonds, supports Treasury borrowing.
• World War II: Fed pegs rates (3/8% bills, 2½% long bonds) to hold down debt costs.
  
  

1951 – The Treasury-Fed Accord

• End of wartime rate pegs.
• Landmark agreement restores Fed’s control over monetary policy.
  
  

1971-1978 – Nixon & Burns

• Nixon pressures Chair Arthur Burns to keep rates low before the 1972 election.
• White House tapes confirm direct intervention.
• Outcome: runaway inflation, credibility collapse.
  
  

1979-1987 – Volcker’s Stand

• Paul Volcker raises rates near 20% to crush inflation.
• Severe recession follows, but Fed autonomy is reasserted.
  
  

1965 & 1980s – Other Political Flashpoints

• LBJ’s “woodshed” confrontation with Chair William McChesney Martin over rates (1965).
• Reagan era: criticism of Volcker’s tight money, but reappointed in 1983.
  
  

2025 – Renewed Pressure

• President Trump attempts to remove Fed Governor Lisa Cook, unprecedented in Fed history.
• Also fires BLS Commissioner Erika McEntarfer after controversial jobs-data revisions.
• Markets fear erosion of independence, echoing past lessons.
  
  

1 The Treasury-Fed Accord of March 1951 formally ended the Federal Reserve’s obligation to peg interest rates on government securities, a practice maintained during World War II to keep borrowing costs low. The agreement restored the Fed’s authority over monetary policy and is widely regarded as the foundation of modern central bank independence.

2 The Fed’s accommodative stance contributed to double-digit inflation by the mid-1970s, eroding public trust in monetary policy.

3 When Paul Volcker became Fed Chair in 1979, inflation exceeded 11%. He raised the federal funds rate toward 20%, sparking the 1981–82 recession but breaking inflation’s momentum. By 1983, inflation had fallen to around 3-4% and stayed subdued for much of the decade, cementing the Fed’s reputation for independence.

4 According to accounts, Johnson physically confronted Martin, saying the hike threatened his “Great Society” programs. Ultimately, the Fed partially relented, keeping monetary policy looser than Martin initially intended; inflation, which had been stable at about 1%, began to climb by the late 1960s, setting the stage for the stagflation of the 1970s.