Increasing political influence, including presidential pressure and politically-aligned board appointments, is compromising the Federal Reserve's independence. This suggests future monetary policy may be more dovish than economic data warrants, as the Fed is pushed to prioritize short-term growth ahead of elections.

The threat to the Federal Reserve's independence is not limited to a single appointment. It involves a broader potential strategy of simultaneously nominating a chair, replacing other board members like Lisa Cook, and filling vacancies as they arise. This creates the possibility for a majority of the Fed board to become politically aligned with the administration.

Markets react sharply to clear, quantifiable events like tariff announcements but are poor early-warning signals for gradual, harder-to-price risks like the erosion of democratic norms. This creates a dangerous complacency among investors and policymakers.

While tariffs were a dominant market concern previously, they have fallen in priority for investors. The primary focus has shifted to more systemic risks, including the potential for fiscal dominance over the Federal Reserve and the long-term trend of "de-dollarization" among global institutions.

Alan Blinder identifies a pending Supreme Court case on the President's power to remove a Fed governor as a potential market catalyst. An adverse ruling would set a precedent allowing political removal of governors, which could abruptly awaken "bond vigilantes" to the reality of a compromised central bank.

Ongoing political pressure, including attempts to remove a governor and uncertainty over the next Fed Chair, is perceived as a threat to the Federal Reserve's independence. This political risk is a key factor leading to the view that inflation break-evens are too low and their risks are skewed to the upside.

The Federal Reserve's power extends beyond setting interest rates to controlling the nation's core financial infrastructure. This supervisory power could be weaponized by a politicized board in ways that don't directly affect the value of the dollar, meaning bond markets wouldn't signal the danger.

Alan Blinder argues that financial markets are severely underpricing the risk of political interference at the Federal Reserve. He cites the President's attempt to remove a governor and political appointments as clear threats that defy historical norms, calling it "one of the biggest underreactions" he's ever seen.

The debate over Fed independence is misplaced; it has already been compromised. Evidence includes preemptive reappointments of regional bank presidents and outspokenness from governors concerned about being bullied, indicating the Fed no longer operates in its prior insulated environment.