US Federal Reserve | When the fog of missing data meets the power of politics: The third consecutive interest rate cut

Overall, 2025 is clearly a gold boom year, coupled with a weaker dollar.

The US Federal Reserve has made history – but under circumstances that could hardly be more dire. With its third consecutive interest rate cut, now to between 3.50 and 3.75 percent, the Fed is attempting to avert a looming recession while simultaneously operating virtually blind. A 43-day government shutdown has left a massive data gap, preventing the central bankers from gaining a clear view of inflation and the labor market. But the missing figures are only part of the problem: Under President Donald Trump, the political pressure on this supposedly independent institution has reached a new and alarming level.

Caught between a cooling labor market, which bears dangerous similarities to past crisis years, and artificially fueled inflation by tariffs, the Fed faces a critical test. Internal disagreements within the monetary policy committee reflect the external uncertainty: Will easing monetary policy save the housing market or accelerate inflation?

The following analysis illuminates the complex background of this decision, the impact of “Trumponomics” on the global financial architecture, and the direct consequences for Europe, the price of gold, and the global economy. It demonstrates why the year 2026 will determine not only the future of the dollar but also the independence of the world's most powerful central bank.

Red alert in the USA: The labor market is collapsing, but inflation remains high – is stagflation imminent?

The US Federal Reserve cut its benchmark interest rate again on December 10, 2025, narrowing the target range to 3.50 to 3.75 percent. This third consecutive rate cut marks a remarkable turning point in American monetary policy, but it is taking place under conditions that are virtually unprecedented in modern central banking history. The 43-day government shutdown from October to November created a data gap that poses significant challenges even for seasoned monetary policymakers. At the same time, President Donald Trump is intensifying his pressure on the central bank with a vehemence that is putting the Fed's institutional independence to an unprecedented test.

Division in the committee: The dilemma between job losses and inflation

The decision to cut interest rates was made in a divided monetary policy committee. Three members deviated from the majority vote: Stephen Miran advocated for a more aggressive 50-basis-point cut, while two colleagues voted for unchanged rates. This disagreement reveals the fundamental dilemma facing the central bank. On the one hand, there is a labor market that has been signaling weakness for months. The unemployment rate climbed to 4.4 percent in September, and in some calculations even to 4.44 percent. The number of announced mass layoffs reached one of the highest levels since records began in 2006, with 39,006 cases in October. Only in the crisis years of 2008, 2009, 2020, and in May 2025 were the figures even more alarming.

On the other hand, inflation remains stubbornly above the target of two percent. Core inflation stood at 2.8 percent in September, while overall inflation reached three percent. This development is all the more worrying given that it is occurring against the backdrop of a massive tariff policy. Trump has imposed punitive tariffs of 20 percent on EU imports and 34 percent on Chinese goods. Economists warn that these measures could push inflation up by an additional 0.8 percentage points in 2025. The Fed is thus caught in a classic inflation trap: If it lowers interest rates further, it risks accelerating inflation. If it raises interest rates or leaves them at their current level, it risks a further deterioration of the labor market.

Data blind flight and deceptive market reactions

The data available for the interest rate decision was exceptionally thin. Due to the shutdown, the central bank lacked complete inflation and employment figures for October. The November figures will not be available until the next Fed meeting. The release of wholesale prices was also postponed until mid-January 2026. The monetary policymakers thus had to rely more than usual on estimates from private institutions and their own surveys. Goldman Sachs combined pre-released seasonal factors with state-level figures to even get a rough idea of ​​initial jobless claims. This methodological improvisation underscores the difficulty of monetary policy evaluation.

Markets initially reacted positively to the interest rate cut. The major Wall Street indices rose by 0.5 to 1.2 percent. The dollar index extended its losses, falling by more than half a percent. Gold, which traditionally benefits from low interest rates, gained half a percent and moved toward $4,235 per ounce. However, these reactions mask underlying tensions. The euro has already appreciated by about twelve percent against the dollar over the course of 2025, which poses a significant burden for European exporters. While further dollar weakness might improve the competitiveness of the US economy in the short term, it would simultaneously make imported goods more expensive and thus further fuel inflation.

The Fed now expects significantly stronger growth in 2026 than it forecast in September. The central bank now anticipates an increase of 2.3 percent, compared to 1.8 percent three months earlier. For the current year, the Fed slightly revised its expectations upward to 1.7 percent. This optimism seems surprising at first glance, but is partly explained by the anticipated massive government spending. The German economic research institute KfW expects that spending already planned for 2025 will not be implemented until 2026, which should provide a strong positive boost.

The Fed's inflation forecast for 2026 was surprisingly lowered from 2.6 to 2.4 percent, despite its protectionist tariff policy. For 2025, the central bank now expects 2.9 percent instead of 3.0 percent. This slight downward revision may be technically justifiable, but it potentially ignores the delayed effects of trade policy. Economists like Thomas Gitzel of VP Bank are already warning that the tariffs will have a more pronounced impact on price developments than previously assumed. Tariff-induced inflation typically builds up slowly over several months and is expected to become more noticeable in the summer.

Political tug-of-war and the crisis in the real estate market

The political pressure on the Fed is reaching a new level. Trump has repeatedly attacked Fed Chair Jerome Powell publicly in recent months, calling him "Jerome too late" and a "bad guy." His motivation is clear: The president wants to stimulate the housing market to address concerns about general housing affordability ahead of the crucial 2026 midterm elections. Mortgage rates have been above six percent since the end of 2022, significantly higher than the two to three percent seen during the Covid-19 pandemic. Many households that took out cheap long-term loans at that time are now unwilling to refinance them at more than double the original amount.

The American housing market is in a structural crisis. The median price of a new home exceeded $400,000 in 2021 and has continued to rise since. The average 30-year mortgage rate is expected to reach 6.18 percent in 2026 and only fall to 5.88 percent in 2027. This moderate easing is occurring despite market expectations of further interest rate cuts by the Fed. According to the National Association of Realtors, first-time buyers now make up only 21 percent of the market, a historic low. Housing demand is being hampered by a lack of affordability, high prices, increased mortgage rates, and growing fears of unemployment.

The outlook for the housing market remains subdued. Experts expect price increases of only 1.4 percent for 2026, according to the S&P CoreLogic Case-Shiller Composite Index for 20 metropolitan areas. This would be the lowest annual increase since 2011. The Fed's interest rate cuts will therefore not be able to trigger the housing boom hoped for by Trump. Prices are already too high, the supply of affordable entry-level homes is too limited, and the employment situation remains too uncertain. Sales of existing properties are projected to remain stable at an annualized level of 4.1 to 4.2 million units for the coming quarters, significantly below the peak of 6.6 million at the beginning of 2021.

The future of the Fed: Loyalty versus independence

Jerome Powell's term ends in May 2026. Trump has announced that he will nominate a successor in early 2026. Kevin Hassett, Trump's top economic advisor and head of the National Economic Council, is considered a promising candidate. Hassett, who already served as chairman of the Council of Economic Advisers from 2017 to 2019 during Trump's first term, is regarded as a loyal follower of the president. While he publicly advocates for the Fed's independence, he believes that the risks of overly restrictive monetary policy outweigh the danger of rising inflation. Experts like Joe Kalish of Ned Davis Research warn that Hassett, as a member of Trump's cabinet, would be the worst choice with regard to the Fed's independence.

The prospect of a Trump-dominated Fed is already casting its shadow. Economists like Georg von Wallwitz of Eyb & Wallwitz are convinced that the Fed under Hassett would pursue an aggressive, growth-friendly course. Stephen Miran, the newest member of the Fed's board, is already advocating for significant interest rate cuts, fully aligning himself with Trump's position. The president nominated Miran in September after Governor Adriana Kugler's unexpected resignation. With Hassett at the helm and other loyal appointments on the seven-member board of governors, Trump could effectively control monetary policy from mid-2026 onward.

Financial markets are already pricing in this development. The dollar reacted sharply to the growing likelihood of Hassett's appointment, losing 0.3 percent against the euro. The yield on ten-year US Treasury bonds fell slightly to 4.07 percent. However, significant risks loom in the long term. Commerzbank economist Jörg Krämer expects the average US inflation rate over the next ten years to be significantly higher than the central bank's target of two percent due to the eroding independence of the Fed. The ZEW (Centre for European Economic Research) forecasts inflation rates of 3.2 and 3.1 percent for 2025 and 2026, respectively, which significantly exceed the Fed's target. Even for 2027, expectations of 2.9 percent imply sustained downward pressure on the US price level.

The institutional risks are considerable. The Fed's independence has been considered virtually sacrosanct since President Richard Nixon's massive interventions in the 1970s. It is crucial for the dollar's status as the world's reserve currency and the attractiveness of US Treasury bonds as a safe haven. Through his repeated attacks on the Fed, Trump is jeopardizing investor confidence in the central bank's credibility and independence. This could lead to significant turbulence in global markets and prevent the US from refinancing its massive $35 trillion national debt through the capital markets. The stability of the global financial system is at stake.

Mountain of debt, AI dependency and the spectre of stagflation

Fiscal conditions are exacerbating the dilemma. Interest payments on US public debt amounted to approximately $1.126 trillion in 2024, up from $875 billion the previous year. Annual debt servicing costs are projected to reach nearly $1 trillion by 2025. The average interest rate on outstanding government debt is currently around 3.20 percent and is expected to gradually rise to 4.50 percent, in line with nominal growth. The debt-to-GDP ratio, the proportion of interest payments to total government revenue, already exceeded 12 percent in 2023. Simulations indicate that this ratio could climb to 22 percent by 2035, a record high for the US.

This development dramatically restricts fiscal room for maneuver. After deducting mandatory spending on Social Security, Medicare, and Medicaid, the US government currently has about 50 percent of its expenditures, or roughly $3.7 trillion, remaining. If interest payments are also subtracted, the discretionary spending leeway shrinks to a mere 25 percent of all expenditures, or $1.8 trillion. Almost half of this is defense spending, which, given the geopolitical situation, is not to be cut but rather expanded. Fiscal policy has thus effectively become obsolete as a means of addressing economic crises.

The effects of US interest rate policy on the American economy are multifaceted. Lower interest rates make loans cheaper for businesses and consumers, which can stimulate consumer spending and investment. Mortgages, auto loans, corporate financing, and credit card interest rates will decline in the medium term. This could boost the economy and create new jobs. However, recent labor market data signals a slowdown. Most companies are barely hiring, and few employees are leaving their jobs. The labor market is frozen.

The US economy is projected to grow by nearly two percent in 2025, putting it in a better position than the German economy. However, this growth is heavily dependent on the artificial intelligence boom. OpenAI, Google, and others are building massive data centers across the US for their AI programs. Experts estimate that their investments accounted for half of the US economic growth in the first half of 2025. This one-sided dependence carries significant risks. Should the AI ​​boom lose momentum, the US economy could quickly slip into recession.

The risk of stagflation is real. The US economy could enter a phase of weak growth coupled with high inflation. In an aggressive scenario involving 60 percent tariffs on all Chinese goods, tariffs on goods from the rest of the world, and strict immigration restrictions, weaker trade, a slump in investment, and a general crisis of confidence would likely plunge most economies worldwide into recession. For the US, however, this combination would have more likely stagflationary consequences. As the growth outlook deteriorates, slower growth would be more likely to be accompanied by higher, rather than lower, inflation.

An aggressive Trump might attempt to implement extensive fiscal stimulus, but stronger demand would quickly encounter a deteriorating supply side of the economy. GDP growth would likely initially plummet due to massive disruption before receiving some support from stimulus measures by 2026. The negative growth effects of the US's own tariff increases are short-lived and will dissipate by 2026. Retaliatory measures from trading partners, however, have more lasting effects, reducing economic growth by an additional 0.6 percentage points in both 2025 and 2026. Overall, this results in a nearly two percentage point loss in US economic growth for 2025.

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Europe caught in the grip of US trade policy and currency shifts

The impact on the European Union is considerable, though less so than in the US. The negative effects of the trade conflict are slowing growth in the Eurozone. The trade conflict means fewer exports to the US and increased import competition from China. Chinese exporters, unable to sell their goods in the US, have recently lowered their prices for exports to the Eurozone significantly. This is leading to deflationary pressure in Europe, while simultaneously harming the competitiveness of European companies.

German exports to the US fell by 7.5 percent in 2025, while exports to China declined by an even steeper 11.5 percent. Between January and October 2025, imports increased by 4.6 percent compared to the same period of the previous year, while exports rose by only 1.1 percent. Trade with China is proving particularly problematic. German exports plummeted, while imports surged. Germany's trade deficit with China in 2025 was 3.6 times higher than in 2020, and for the Eurozone as a whole, it doubled.

The European Central Bank (ECB) is not following the Fed's lead in interest rate cuts. Unlike the Fed, the ECB continued its rate-cutting cycle in the first half of 2025, reducing all three interest rates by 0.25 percentage points to 2.0 percent on June 5, 2025. This was the fourth rate cut that year. Between June 2024 and June 2025, the ECB lowered borrowing costs by 200 basis points. Markets expect interest rates to remain stable in the short term, with the first 25-basis-point cut potentially occurring in July 2026. Analysts predict that the deposit rate could fall to around 2.0 percent by the end of 2025, while some experts even consider 1.5 percent possible.

The euro has experienced significant fluctuations in 2025, appreciating by approximately twelve percent against the dollar so far. This appreciation has had varying effects on imports and exports. Imports become cheaper because less has to be paid for foreign products from the dollar zone within the eurozone. Consumers can benefit considerably from this if the euro's appreciation is substantial. Even oil and gas imports from the Middle East often become cheaper because they are invoiced in dollars. Conversely, exporting companies lose international price competitiveness. With the same price in euros, the selling price in the target market increases when expressed in US dollars.

A 10 percent appreciation of the euro would significantly reduce inflation over a three-year period, with the greatest impact occurring in the first year, when the pace of price increases would be 0.6 percentage points slower than usual. The ECB already expects the annual inflation rate to fall below its target in 2026, averaging 1.7 percent. A further appreciation of the euro would likely reduce inflation even further and cast doubt on a projected return to the target in 2027.

Positive trends are emerging for Germany in 2026. Gross domestic product (GDP) is expected to increase by 1.2 to 1.5 percent, driven by rising government spending. Other EU countries will also benefit from this. Inflation is expected to settle at 1.7 to 2.0 percent, below or at the ECB's long-term target of two percent. This is due to falling energy prices and lower wage growth. GDP in the eurozone is projected to grow by 1.4 percent in 2025 and 1.0 to 1.3 percent in 2026. Consumer prices are expected to rise by 2.1 percent.

Global shifts: China's evasive maneuver and the plight of emerging economies

The impact on China is complex. China responded to Trump's tariffs with its own retaliatory tariffs, prompting Trump to further increase his tariffs. Eventually, the tariff rate on Chinese exports to the US reached 145 percent, while the reverse rate was 125 percent. However, China has rapidly diversified its trading partners to compensate for the loss of market share in the US. Africa is a particular focus: Exports there rose by 25 percent in 2025 to $122 billion, faster than to other regions. Nigeria, South Africa, and Egypt are the main destination countries.

Trump's aggressive policies have prompted many countries to expand their economic and financial cooperation with China. With China itself impacted by US tariffs of nearly 50 percent, it is increasingly seeking alternative trading partners and suppliers. This dynamic could redefine global trade relations. As part of initial agreements with the US, China announced it would resume supplying key raw materials, while the US, in return, agreed not to bar Chinese students from US universities. Trump also authorized Nvidia to export its H200 AI chip to China in exchange for a 25 percent royalty payment to the US.

The global impact on developing countries is dramatic. Since March 2022, there has been a constant outflow of capital from developing and emerging economies, meaning private capital is being withdrawn and transferred to safe havens in the Global North, primarily the USA. Developing countries have had to take even more drastic measures than the Fed to remain attractive investment locations for volatile capital and to prevent massive capital flight. Rising interest costs are placing a heavy burden on the public finances of developing countries and absorbing scarce resources that are then lacking for development and public goods.

The average interest rate that developing countries will pay their official creditors on their newly issued government debt in 2024 was at its highest level in 24 years. The average interest rate for private creditors was at its highest level in 17 years. In total, these countries paid a record $415 billion in interest alone. Between 2022 and 2024, developing countries paid a total of $741 billion more in interest and principal payments to lenders than they received in new financing.

There are, however, signs of improvement. Key interest rates are being lowered, and bond investors have provided $80 billion in new financing. But this is not inexpensive financing, as interest rates have been as high as 10 percent, roughly double what they were before 2020. In 2024, creditors agreed to restructure $90 billion of developing country debt, something that last happened in 2010. The Fed's interest rate cuts could provide some relief, but the structural problems remain.

Asset classes in focus: Gold rally and overvalued stocks

Currency markets are sensitive to diverging interest rate policies. Any introduction of tariffs would tend to support the dollar because it would offset their impact on trade and the economy. Interest rate differentials are likely to support the dollar again, so it will probably remain strong for some time. Trade policy uncertainty was the main reason for the dollar's appreciation during the 2018-2019 trade conflict. Chinese exporters took advantage of the dollar's appreciation to lower their prices. For every one percent increase in the dollar, exporters reduced their prices in US dollars by about three-quarters of a percent.

The price of gold is benefiting from interest rate cuts and uncertainty. Gold continues to trade near its record highs of over $4,200 per ounce. Since gold does not generate interest, falling interest rates lead to stronger demand for gold as an investment product. With a Fed interest rate cut, investors are more likely to invest in gold bars than in bonds, which generate less interest after the cut. A weaker dollar also supports the price of gold, as the precious metal is traded in that currency. At the same time, an interest rate cut reduces the attractiveness of bonds and money market products, as their yield advantage over gold diminishes.

Goldman Sachs, Bank of America, and JP Morgan expect gold to surpass the $5,000 per ounce mark next year. Goldman Sachs and Bank of America anticipate a gold price around $5,000 by the end of 2026, while JP Morgan sets a target price of $5,200. These forecasts are based on expectations of further interest rate cuts, massive purchases by central banks, and a tense geopolitical environment. According to the World Gold Council, central banks bought 1,136 tons of gold worth approximately $70 billion in 2022, a record high. Particularly fast-growing emerging economies such as China, India, and Turkey are increasing their gold reserves at a rapid pace.

Bond markets have been volatile recently. Prices have factored in the likelihood of Trump's policy strategy and its potential impact on inflation and interest rates. Bond markets have corrected upward on a combination of strong growth, more stable recent inflation data, and expectations of further reflationary policies under the new administration. Bonds are now pricing in between one and two 25-basis-point interest rate cuts by the Federal Reserve for 2025, after having priced in more than four in September.

US stock valuations, aside from the peak of the dot-com bubble, are at their highest levels in 143 years. Regardless of the new administration's political direction, it's questionable whether these valuations can be sustained. Those concerned about the high valuations of US stocks can look to the lower end of the market capitalization scale. Small- and mid-cap companies are more attractively valued than those with a high market capitalization. Small- and mid-cap companies have a customer base that is predominantly or entirely based in the US. They offer a more direct and cost-effective way to access the US economy.

The central challenge for investors is assessing the likelihood of a particular policy measure being implemented. This challenge will persist until there is clarity regarding the policy direction. Financial markets could price in any of these measures during 2025, even if they never materialize, leading to increased volatility across all asset classes. The trade war and the threat to the Fed's independence are creating an uncertain environment for financial markets, which is likely to push volatility, currently at yearly lows, back up.

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A fine line for monetary policy

The Fed signaled in its updated projections that further interest rate cuts in 2026 will be rare. The central bank's projections indicate total rate cuts of just 25 basis points for 2026, unchanged from the September projection. Markets currently see a nearly 78 percent probability that the Fed will keep interest rates stable in January 2026, compared to a 70 percent probability shortly before the rate cut announcement. Fed Chair Powell said during the press conference that policymakers need time to see how the Fed's three rate cuts this year are affecting the U.S. economy. Powell added that he expects the impact of tariffs to ease next year. Barring any major new tariff announcements, goods inflation is expected to peak in the first quarter.

The Fed's recent interest rate cut under challenging circumstances reveals the fundamental dilemmas of modern monetary policy. The central bank must balance rising risks in the labor market with simultaneously increasing inflation. It operates in a difficult environment where both inflation and the labor market situation must be considered. The decision to prioritize the labor market, thus favoring doves over hawks, is understandable given the drastic deterioration in employment. However, it carries significant risks.

The dilemma persists: While the labor market is losing momentum, with overall inflation at three percent and core inflation at 2.8 percent in September, prices remain stubbornly above the Fed's target of two percent. The Fed is not entirely opposed to the interest rate cuts vehemently demanded by Trump, but it is still grappling with inflation significantly higher than the two percent target. The central bank had to make its decision under challenging circumstances, and these circumstances are not expected to improve fundamentally in the foreseeable future.

The structural challenges facing the US economy extend far beyond the short-term economic situation. National debt is growing unchecked, the debt-to-GDP ratio is reaching historic highs, and fiscal room for maneuver is shrinking dramatically. At the same time, the institutional independence of the Fed, which for decades has been considered a crucial guarantor of sound price developments and economic stability, is threatened with erosion. In the US, this principle is coming under increasing pressure, and the consequences could be devastating.

The global repercussions should not be underestimated. The US remains the world's largest economy, the dollar the most important reserve currency, and the Fed the most influential central bank. Decisions made in Washington have consequences for Europe, China, emerging markets, and the entire global economy. Diverging interest rate policies, protectionist trade policies, and institutional uncertainty are creating an environment in which traditional mechanisms no longer function. The world is at a turning point, and the decisions made in the coming months will have repercussions for decades to come.

The Fed faces its toughest test since the financial crisis. It must find a path between Scylla and Charybdis, between recession and stagflation, between institutional integrity and political pressure. The third consecutive interest rate cut may bring short-term relief, but it is no solution to the underlying problems. The US economy, the global economy, and global financial markets will be watching this tightrope walk with the utmost attention. Because one thing is certain: The decisions made today will shape the economic landscape for years to come. And the risks have rarely been greater.

From independence to control: The Turkish scenario in America

The parallels between Trump's current attacks on the independence of the Federal Reserve and Recep Tayyip Erdoğan's dismantling of the Turkish central bank are not only visible but are being discussed with growing concern by economists and financial experts worldwide. What was described in the original text as a diplomatic understatement—an “erosion of independence”—is in fact a systematic takeover of monetary policy by the executive branch, increasingly referred to in academic discourse as the “Erdoğanization” of US monetary policy. This characterization is not an exaggeration and points to a historical warning signal that the global economy cannot ignore.

The foundation of this comparison rests on a fundamental ideological miscalculation shared by both Erdogan and Trump. For years, Erdogan has championed the economically discredited thesis that high interest rates cause, rather than combat, inflation. The Turkish president justified his low-interest-rate policy with religious arguments, describing high interest rates as a violation of Islamic principles. Above all, however, he pursued a political goal: he hoped that cheap credit would stimulate economic growth and boost the purchasing power of the population, two key campaign promises for the upcoming elections. Trump argues similarly, but explicitly refers to the housing market and affordability for first-time buyers. In both cases, short-term growth and political popularity are prioritized over the long-term protection of the currency and price stability.

The parallels in personnel strategy are unmistakable. Erdogan methodically fired central bank governors who opposed his demands for interest rate cuts. In September 2022, central bank governor Sahap Kavcioglu was forced out after failing to implement the economically necessary interest rate hikes. In December 2023, Erdogan replaced him with Hafize Gaye Erkan, an economist more aligned with Erdogan's ideology. This cycle repeated itself several times until the Turkish central bank came entirely under political control. Trump is following the same pattern with surgical precision. In September 2025, he nominated Stephen Miran, a Harvard economist and loyal Trump supporter, to the Fed's Board of Governors. Miran immediately called for significant interest rate cuts after his nomination, thus demonstrating his conformity to the system. The crucial shift will occur starting in May 2026, when Powell's term ends. Trump has already signaled that Kevin Hassett, the chairman of the National Economic Council and one of his most loyal advisors, will become the new Fed chief.

The crucial point about this strategy is that it's not based on formal oversight, but on loyalty. With Hassett at the helm of the Fed and other Trump loyalists on the seven-member Board of Governors, Trump doesn't need legislation to control monetary policy. A board comprised mostly of yes-men will de facto do what the president wants. As financial analyst Joe Kalish of Ned Davis Research warns, Hassett, as an active cabinet member, is "the worst choice in terms of Fed independence." The institutional facade remains intact, but the substance is gone.

The public dismantling of authority is another key aspect of this parallel. Erdogan publicly labeled high interest rates the “mother of all evils” and systematically attacked central bank governors in television interviews and on the street. He created a political climate of delegitimizing the central bank. Trump uses similar tactics. He repeatedly called Jerome Powell a “bad guy,” a “moron,” and a “loser.” These terms are not mere rhetoric but a strategic tool to delegitimize the Fed in the eyes of the general public and to generate political pressure on the central bank's governing body. When the president publicly caricatures the central bank, it sends a powerful signal to congressional allies, financial market participants, and the markets themselves that the Fed is no longer the unassailable institution it has been for decades.

The disastrous economic consequences are documented in the Turkish example. Under pressure from Erdoğan, the Turkish central bank's key interest rate fell from 24 percent in July 2019 to 8.25 percent in October 2023, even though inflation rose rapidly during this period instead of falling. The inflation rate reached 61.5 percent in May 2022 and initially settled at a level of over 35 to 50 percent before slowly declining under pressure. In the worst year, 2023, inflation averaged over 75 percent. The lira collapsed, at times losing over 90 percent of its pre-crisis value against the dollar. Turkish companies and the government, which had taken on debt in foreign currencies, were brought to the brink of collapse by the currency devaluation.

For the US, all indicators suggest that a similar scenario under a Trump-controlled Fed is not only likely but almost certain. Commerzbank is already warning that the long-term inflation rate under a Trump-dominated Fed will remain permanently above the Fed's target of two percent. The Centre for European Economic Research (ZEW) projects that the US will experience inflation of 3.2 percent in 2025 and 3.1 percent in 2026, significantly above the target. In the medium term, analysts even expect inflation rates of 3.5 percent for 2026, and Trading Economics forecasts that long-term consumer inflation expectations will remain anchored at 3.0 percent. This is not the catastrophic hyperinflation of Turkey, but rather the same structural shift: the purchasing power of the currency is being sacrificed to finance short-term political objectives.

The crucial difference lies in the global consequences. Turkey is a regional actor of medium rank. A loss of confidence in the Turkish central bank harms Turks and some of their trading partners. The US, on the other hand, is the world's largest economy, and the dollar is the global reserve currency. The dollar's safe-haven status and confidence in the Fed's credibility are the foundation of the international financial system. If this foundation erodes, the entire architecture of global financial stability erodes.

The first cracks are already appearing. Investors are hesitant. Risk premiums for US Treasury bonds have risen, a sign that the market is reassessing default risk. Countries like Russia and China are actively building up reserves that are not denominated in dollars. Central banks are buying gold in record quantities, classically a sign that they no longer fully trust the traditional reserve system. The rating agency Scope has already downgraded the US credit rating, directly citing “the increasing concentration of executive power over independent institutions.”

The emerging scenario is not that the US will descend into a Turkish-style hyperinflationary hell, but rather that it will enter a state of chronic overinflation, where inflation hovers around four percent instead of the two percent target the Fed has committed to. This leads to several destructive consequences. First, the dollar loses international confidence, undermining its role as the reserve currency. Second, real interest rates on US government debt rise as investors demand an inflation premium. Third, the already worrying US debt dynamics become unsustainable. With an average inflation rate one to two percentage points higher than targeted, nominal spending rises faster than nominal revenue, causing the debt to explode.

The globalization model of the last four decades was based on trust in the American monetary system and the independence of the Fed. If Trump demolishes this trust, as Erdogan did in Turkey, the global trade and financial order will fragment. Developing countries that hold their debts in dollars will be harmed by a falling dollar and rising global interest rates. European exporters will lose competitiveness due to a stronger euro. Emerging markets will experience massive capital outflows when safe havens suddenly appear less safe and yields for newer, safe havens rise. The global economy will be slowed, not stimulated.

The historical precedent is clear. In the 1970s, under President Richard Nixon, the Federal Reserve, under its chairman Arthur Burns, yielded to political pressure and kept interest rates low to stimulate growth before the election. The result was one of the worst inflationary periods in American history. Inflation climbed to over 13 percent while economic growth stagnated, leading to the legendary stagflation. It took Paul Volcker and the “Volcker Shock,” with interest rates exceeding 20 percent, to curb inflation, but this also triggered one of the deepest recessions of the post-war era. The lesson was painful but important: central bank independence is not a luxury, but a necessity for long-term economic stability.

Nevertheless, it is not a given that Trump will gain complete control of the Fed. The US Senate must confirm Hassett as Fed chair, and several senators have already expressed skepticism. Institutional memory, the legal culture, and the separation of powers in the US are different from those in Turkey. Democracy is more firmly entrenched. So there is a real chance that the US will escape the Turkish trap. But that chance diminishes with each passing month.

The central message is inescapable: What was phrased in the original text as a cautious warning about an “erosion of independence” is nothing less than an existential threat to the credibility of the world’s largest economy and the global financial system. If Trump succeeds in what all signs indicate he is attempting, the world will enter an era of fundamental economic uncertainty. Turkey is just a small warning. America would drag the entire global order down with it. This is not alarmism, but pragmatism based on historical facts and current trends.

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Konrad Wolfenstein

I would be happy to serve you and my team as a personal advisor.

You can contact me by filling out the contact form or simply call me on +49 89 89 674 804 (Munich) . My email address is: wolfenstein ∂ xpert.digital

I'm looking forward to our joint project.

☑️ SME support in strategy, consulting, planning and implementation

☑️ Creation or realignment of the digital strategy and digitalization

☑️ Expansion and optimization of international sales processes

☑️ Global & Digital B2B trading platforms

☑️ Pioneer Business Development / Marketing / PR / Trade Fairs