Trump’s failed attempt to remove Lisa Cook, the first Black woman ever appointed to the Board of Governors of the Federal Reserve (Fed), is part of a broader plan to bring the US’s central bank to heel and dismantle the rule of law. By stacking the board with loyalists, Trump aims to bend monetary policy to his will, cutting rates to finance tax breaks for the wealthy and to try and manufacture short-term growth, rather than safeguarding long-term economic stability. This is not about better economic management, but about weaponising the central banks to serve partisan ends while sidelining society’s real challenges: inequality, inflation, instability, and the climate crisis. 

The reality is that Trump’s agenda would weaken, not strengthen, the US economy. A politicised Fed is likely to dismiss the real causes of price instability, and instead become a source of instability itself. Since the dollar underpins global finance, a loss of confidence in the Fed could destabilise US Treasuries and spike global borrowing costs at a time when predictable financing is critical for competitiveness and the green transition. 

Trump’s attempt to subordinate the Fed is part of a global trend. Turkey’s Erdoğan has repeatedly fired central bank governors who hiked interest rates; Modi has overridden decisions by the Central Bank of India in an effort to bring it under tighter government control; Nigel Farage’s Reform UK has railed against central banks buying bonds (a practice known as quantitative easing), as has Germany’s AfD, accusing the European Central Bank of stoking inflation. Ironically, French National Rally’s Jordan Bardella wants the ECB to do exactly the opposite: buy bonds to relieve France’s public debt situation. Their goal is not only to weaken technocratic authority but to capture monetary power as a political tool.  

Defending central bank independence against capture by the populist right is essential to upholding the rule of law and separation of powers, as well as keeping inflation in check. But protecting independence cannot mean defending the current technocratic orthodoxy that has too often failed society.  

Price stability at what cost? 

For decades, central bank independence has been sold as a guarantee of stability. But while the ECB has recently declared victory over inflation, the reality is far less flattering.  

A recent paper by the International Monetary Fund (IMF) shows that, in 2022-2023, inflation-targeting central banks (those that, like the ECB, focus on keeping prices within a narrow range) performed no better in curbing inflation than central banks guided by broader mandates that also consider growth, employment, and financial stability. Other studies show that central banks in general tend to overstate the efficacy of monetary policy in controlling inflation.  

The biggest reason for such failure is likely that the central banking orthodoxy misunderstood the source of inflation and applied the wrong cure. Central banks acted as if inflation was driven by demand-led pressure, when it was in fact predominantly caused by a “cost-push” – namely, skyrocketing global fossil fuel energy prices. 

Moreover, as Isabella Weber and other economists have argued, the price surge of 2022-2023 was made worse by “greedflation”, where dominant firms raised prices to protect or expand their profit margins. Meanwhile, empirical research found that, in the US, roughly half of the excess fossil-fuel profits went to the wealthiest 1 per cent of households, while the bottom half received less than 1 per cent. Other research by Weber and colleagues empirically demonstrated that rate hikes (the recipe central banks typically use to curb inflation) cannot break greedflation, because firms simply pass higher financing costs on to consumers.  

Worse still, the ECB’s policies have not only been ineffective against inflation – they’ve been counterproductive for the green transition. New empirical evidence suggests that every time the ECB raises rates by 0.25 per cent, it reduces new offshore wind installations by 8 per cent and solar photovoltaic installations by 26.5 per cent, due to higher capital cost for these investments.  

The ECB’s policies have not only been ineffective against inflation – they’ve been counterproductive for the green transition.

And as economists Luca Fornaro, Lucrezia Reichlin and Veronica Guerrieri warn, the ECB’s short-term focus on price stability could undermine its own long-term goals of price stability. Even if inflation is stable for now, climate disruption will make supply shocks more frequent. ECB researchers estimate that by 2035, depending on the level of global warming, headline inflation could increase by 0.3-1.2 per cent a year on average, while food prices could rise by 0.9-3.2 per cent a year. As climate damages intensify, dealing with supply shocks will only grow more complex.  

Add it all together, and it’s clear that the current monetary policy framework has not only failed to keep inflation in check but is increasingly ill-equipped for the world we inhabit.  

More coordination, not less independence 

The challenge is to preserve the ECB’s credibility and autonomy while aligning monetary policy with long-term goals like competitiveness, affordability, and climate resilience. 

Such a strategy should start by recognising that, contrary to central banking textbooks, inflation is not always a monetary problem. It can stem from multifaceted phenomena such as geopolitical shocks, supply bottlenecks, climate events, or corporate profiteering. In such a complex and uncertain world, one single instrument – interest rate – cannot solve it all. By contrast, a combination of instruments deployed by both central banks and governments could be more effective in achieving price stability.  

Inflation is not always a monetary problem. It can stem from multifaceted phenomena such as geopolitical shocks, supply bottlenecks, climate events, or corporate profiteering.

Such coordination could be implemented within the existing legal framework. The ECB’s legal mandate already allows it to support EU economic policies as long as they do not prejudice price stability. However, this secondary mandate is poorly defined and therefore often neglected. For example, should the ECB provide lower interest rates or more lenient collateral rules for renewable energy businesses and affordable social housing? Or should it instead support labour-intensive manufacturing industries? These are deeply political questions that unelected central bankers lack the democratic legitimacy to decide on. 

As multiple academics and policymakers have argued in recent years, central bankers shouldn’t have to make such consequential choices alone. In line with the Maastricht Treaty’s concept of the “broad guidelines” on economic policies, EU member states, together with the European Commission and the Parliament, should jointly define a small number of time-bound secondary objectives that reinforce price stability, such as cutting reliance on imported fossil fuels or boosting investments in affordable housing. 

Accountability mechanisms should be reinforced, so the ECB can justify its decisions in a transparent way, including when it declines to pursue certain secondary objectives. To that end, Professor Eric Monnet and the New Economics Foundation proposed the creation of a coordination council at the EU level. Bringing together finance ministries, the ECB, EU institutions, and competition authorities, such a council would offer a permanent forum to agree on shared objectives and keep potential misalignments in check. 

This approach strengthens the coordination between fiscal policy (primarily a responsibility of EU member states) and monetary policy (part of the ECB’s mandate). Crucially, a whole-of-government approach to macroeconomics enables to focus on tackling the actual origins of the inflationary pressure by encouraging policymakers to deploy the optimal combination of policy instruments.  

During supply-driven inflation, governments should invest to ease real shortages or implement price caps on basic goods, including to limit the spread of inflation to other sectors. In the presence of greedflation, solutions like rent controls, price caps, windfall taxes, and anti-monopoly action could be appropriate. Greater coordination would give governments stronger incentives to implement these inflation-repressing policies because these measures, if successful, would reduce the need for interest rate hikes, shielding governments from higher debt costs.  

Coordination would also allow policymakers to better prepare for and mitigate future price instability risks. For example, an obvious strategy to pre-empt future energy price shocks is to increase investments in renewable energy generation, storage, and grid interconnections, as well as in energy efficiency, given the disinflationary impact of these investments. Accompanying this strategy with the implementation of a “green interest rate” policy by the ECB would help ensure low and stable financing costs for these investments. 

Serving the people 

The populist right’s path of chaos and capture offers a false solution to a very real problem: a status quo of increasingly impotent central banks in the face of ever more complex challenges. However, there is a different course we could chart for central banking: one that protects their credibility and autonomy while aligning monetary policy more closely with democratically defined goals. 

For the EU, this shift doesn’t require treaty changes, but a new mindset. The ECB has adapted before: Mario Draghi’s “whatever it takes” saved the euro during the European sovereign debt crisis, and his successor, the current ECB President Christine Lagarde, has courageously brought climate change into central bankers’ minds. The question now is whether politicians in Brussels and Frankfurt can rise to the new challenge. If not, they risk reinforcing the feeling that central banks serve elites, not the people.