Trump's assault on the Fed: A blow to dollar credibility and stability

Editor's note: Xin Ge, a special commentator on current affairs for CGTN, is a research fellow at the Institute of Public Policy and Governance, Shanghai University of Finance and Economics (SUFE), and a chair associate professor at the School of Public Administration and Policy, SUFE. The article reflects the author's opinions and not necessarily the views of CGTN.

The political theatrics in Washington have taken yet another unprecedented turn. On Monday, U.S. President Donald Trump attempted to dismiss Federal Reserve Governor Lisa Cook on allegations of housing mortgage fraud. Cook, invoking her statutory protections, rejected the move and affirmed her intention to continue serving. Beyond the personal clash, this episode exposes a deeper crisis: the erosion of the Federal Reserve’s institutional independence, with consequences that will reverberate far beyond America's borders.

The Federal Reserve's credibility rests on its insulation from short-term political pressures. Governors serve 14-year terms, and removal is permissible only "for cause," a threshold deliberately set high to prevent partisan interference. This framework was designed to protect monetary policy from electoral cycles and presidential whims. Trump's invocation of unsubstantiated "mortgage fraud" charges against Cook appears less a legal argument than a political maneuver.

The implications extend far beyond a single personnel dispute. The Fed derives its authority not from coercion but from credibility. Global investors, businesses and governments trust that its decisions are data-driven and guided by long-term stability rather than political expediency. By attacking a sitting governor, the White House has signaled that even the Fed may be vulnerable to partisan pressure. This erodes the trust upon which global financial stability depends.

Markets have already reacted with unease. Investors rely on the predictability of U.S. monetary policy as the anchor for global asset pricing, cross-border capital flows and exchange-rate stability. The notion that a president might arbitrarily reshape the Board of Governors introduces a new layer of uncertainty. Volatility in equities, bond yields and currency markets reflect this loss of confidence.

For institutional investors in Europe or Asia, the concern is immediate: If monetary decisions are perceived as politically driven, the Fed's signals lose clarity. A rate hike or pause may be read not as a response to inflation but as a concession to presidential pressure, undermining the very purpose of central banking.

More consequential than short-term market swings is the damage to the dollar's global standing. The dollar's role as the world's preeminent reserve currency depends not only on the scale of the U.S. economy but also on the institutional reliability of its financial governance.

Central banks and sovereign wealth funds hold dollars because they trust that U.S. institutions, especially the Federal Reserve, operate above partisan politics. By attempting to bend the Fed to presidential will, Trump has weakened this institutional firewall. The perception that the Fed is vulnerable to political purges undermines the foundation of dollar dominance.

For countries already wary of dollar dependence, this provides new justification to diversify. Efforts to settle trade in local currencies, expand the role of the euro or yuan in reserves, or explore digital alternatives will gain momentum.

The timing could not be worse. Global supply chains remain strained, inflationary pressures persist and geopolitical rivalries are pushing nations toward competing economic blocs. The politicization of U.S. monetary institutions risks accelerating fragmentation. If investors conclude that U.S. monetary policy is no longer impartial, they will hedge against dollar risk, nudging the world toward a more multipolar financial order marked by volatility and inefficiency.

For emerging economies, many of which rely on dollar-denominated debt, an unpredictable Fed magnifies vulnerability, complicating capital-flow management and exchange-rate stability. Ironically, a move intended to consolidate control at home may ultimately weaken U.S. financial influence abroad.

This episode also lays bare the fragility of American governance. For decades, the U.S. has cast itself as a champion of the rules-based order and institutional checks and balances. The Federal Reserve symbolized technocratic stability. By turning it into a political battleground, Washington is sending a starkly different message: No institution is beyond partisan struggle. Allies and rivals alike will draw the conclusion that U.S. governance is increasingly compromised.

For the global economy which is already contending with inflation, supply chain disruptions and geopolitical rivalries, this added uncertainty is destabilizing. Emerging markets dependent on dollar financing will be hardest hit. If U.S. monetary signals lose their reliability, capital flight and currency volatility could intensify, further straining fragile economies. An internal U.S. political dispute thus threatens to export instability across the world.

Even if courts ultimately affirm Cook's position, the damage is already done. The precedent of presidential intervention has pierced the institutional shield that once protected the Fed. International partners will not forget that the independence of America's central bank can be openly challenged. For many, this confirms that the dollar-dominated order carries systemic risks that can no longer be ignored.

In this light, Trump's attempted dismissal of Cook is more than a domestic power struggle. It marks a turning point in global perceptions of U.S. financial governance. By undermining the credibility of the Federal Reserve, Washington has shaken the very foundation of dollar hegemony. For countries exploring financial autonomy and de-dollarization, this moment is both a warning and opportunity. The world is watching closely, and the search for alternatives is certain to accelerate.

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