The ongoing pressure from former US President Donald Trump on the Federal Reserve has raised significant concerns regarding its potential impact on Australia’s economy. Michele Bullock, the governor of the Reserve Bank of Australia (RBA), has defended Jerome Powell, the chair of the Federal Reserve, against Trump’s escalating criticism, urging for the independence of central banks free from political influence.
On Tuesday, Bullock joined nine other foreign central bank leaders in expressing their support for Powell, following claims that a new criminal investigation was initiated due to his decisions not aligning with Trump’s interest rate preferences. Economists caution that if Trump succeeds in pressuring the Fed to cut interest rates, Australia could experience heightened inflation and increased market volatility.
Trump has consistently advocated for lower interest rates, arguing that such cuts would stimulate economic activity and save the US $1 trillion annually. He contends that reduced rates would lessen borrowing costs for Americans, including homeowners, businesses, and the federal government grappling with significant debt. Despite these assertions, the Fed has limited its rate cuts to only three instances in 2025, primarily due to concerns over rising inflation, which was recorded at 2.7%, surpassing the Fed’s target of 2%.
In a striking turn of events, Powell revealed that he faces potential criminal charges from the Department of Justice, asserting that these actions stem from his interest rate decisions that contradict Trump’s expectations. Bullock expressed her “full solidarity” with Powell in an open letter, emphasizing the necessity of central bank independence in maintaining economic stability.
Potential Economic Implications for Australia
The ramifications of a politically influenced Federal Reserve could extend beyond the US, particularly affecting Australia’s economy. Economists, including Harry Murphy Cruise, head of economic research at Oxford Economics Australia, warn that political meddling in interest rate decisions could lead to more inflation and instability in both nations.
“Excessive and unpredictable rate cuts would increase market volatility and weigh on share markets, first in the US and then internationally,” Murphy Cruise noted. The US dollar has already seen a decline since April, attributed to persistent inflation and Trump’s pressure on the Fed. This depreciation has resulted in the Australian dollar rising to 67 US cents from 63 cents.
Moreover, increased inflation in the US could translate into higher prices for goods imported into Australia, impacting items such as heavy machinery and computer equipment. Richard Holden, a professor of economics at the University of New South Wales, explained, “If there’s big inflation in the US and the price of a bunch of the things that we import from the US goes up, then that’s inflationary here.”
Central Bank Independence at Risk
The collective response from Bullock and her counterparts marks a rare intervention against political interference in monetary policy. Jonathan Kearns, chief economist at Challenger, remarked on the unprecedented nature of such a collective statement from central bankers. He highlighted concerns that if the US government successfully exerts more influence over the Fed, it could set a precedent for similar actions in other countries.
Recent historical examples, such as political interventions in Argentina and Turkey, have illustrated how such pressures can lead to increased inflation and slowed income growth. In a contrasting stance, Winston Peters, New Zealand’s foreign minister, criticized the involvement of the Reserve Bank of New Zealand in US domestic matters, reinforcing the principle that central banks should focus on their national monetary policies.
While the RBA maintains its independence in setting interest rates, it is not devoid of scrutiny. Australia’s Treasurer, Jim Chalmers, faced criticism in 2024 for remarks suggesting that the RBA was negatively impacting the economy. Although the government retains the legal authority to override RBA decisions, such actions have not yet occurred.
Bullock has previously refrained from responding to political criticisms directly. In July, she commended Powell for his focus on economic stability, stating, “What’s going on in the United States is challenging but I’d have to say, at the moment, that the Fed is doing what it’s supposed to be doing, which is focusing on the economy.”
As the situation unfolds, the potential implications of Trump’s influence on the Federal Reserve will likely remain a focal point for both the US and Australian economies. The commitment to central bank independence is critical in ensuring stability and confidence in financial markets, both locally and globally.
