The US Federal Reserve in Washington DC, US Photo: Xinhua

Market attention has increasingly focused on whether the Federal Reserve can maintain its independence amid mounting pressures, a situation that reflects the challenges facing the US economy, particularly in light of its tariff policy.

US Treasury Secretary Scott Bessent said that the Fed's vital independence on monetary policy is threatened by its "mandate creep" into non-policy areas, and he called on the US central bank to conduct an exhaustive review of those operations, Reuters reported on Monday.

In a CNBC interview on Monday, Bessent even criticized the Fed for "fear mongering over tariffs," noting that "thus far we have seen very little, if any, inflation."

Bessent's comments mark a dangerous escalation in the conflict between the White House and the US central bank.

The clash between the White House and the Fed has been simmering for months. Fed Chair Jerome Powell has consistently emphasized the need to take a wait-and-see approach, aiming to better assess the impact of tariffs on inflation and the trajectory of the economy. In contrast, the White House is eager to push for interest-rate cuts. 

This policy divergence has evolved into a direct challenge to the Fed's independence, which has long been one of its major strengths. 

This independence, a cornerstone of its policy framework, allows it to make monetary policy decisions based on macroeconomic data and long-term economic goals, free from short-term political interference. Historically, this independence has proven indispensable: from navigating economic crises to reining in inflation, the Fed's ability to act without political interference has been critical to maintaining US financial stability and underpinning global confidence in its monetary regime.

However, this institutional bulwark is facing an unprecedented attack. Bessent's call for a review of the Fed and his open questioning of the Fed's assessment of the impact of tariffs are essentially a microcosm of the White House's pressure on the Fed. 

Wall Street's anxiety over this situation is palpable. If market participants perceive that Fed independence is eroding, moves in financial assets could be wild, some analysts have said. One of the top risks is that investors will sell Treasury bonds, lifting interest rates on longer-term maturities in the US debt market relative to short-term securities, according to a Reuters report last week.

Behind the White House's eagerness to put limits on the Fed's independence lies the uncomfortable reality of the US economy under the backlash of tariff policies. There is widespread concern in the US that, as time goes on, the cumulative effect of tariffs will further drive up inflation, erode consumers' purchasing power, and hamper an economic recovery. When a flurry of new tariffs takes effect on August 1, this could deal an even heavier blow to the US economy.

This economic predicament has created an urgent need for the White House to seek interest-rate cuts, with the purpose of using monetary policy to mitigate the economic impact caused by its tariff policy. 

But this is a short-sighted and risky move. By pressuring the Fed to cut interest rates, Washington is taking a perilous gamble. If the Fed is compelled to make monetary policy decisions under political pressure, international investors may perceive this as a loss of the central bank's independence, significantly undermining the credibility of the US dollar. 

This year alone, the US Dollar Index has already declined by approximately 10 percent, reflecting market concerns about the risks associated with US dollar assets. Should the Fed's independence be further compromised, international investors may hasten their withdrawal, intensifying the depreciation of the US dollar, which would plunge the US economy into an even more complex situation.

Ultimately, this is more than a struggle over interest rates. The outcome of this struggle will shape not only the future of the US economy but also have far-reaching implications for the stability of global financial markets.