Rajan suggests that a central bank's reluctance to aggressively fight inflation may stem from a fear of being blamed for a potential recession. In a politically charged environment, the institutional risk of becoming the 'fall guy' can subtly influence policy, leading to a more dovish stance than economic data alone would suggest.

The Fed's recent rate cuts, despite strong economic indicators, are seen as a capitulation to political pressure. This suggests the central bank is now functioning as a "political utility" to manage government debt, marking a victory for political influence over its traditional independence.

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 primary economic risk for the next year is not recession but overheating. A dovish shift at the Federal Reserve, potentially from a new Trump appointee, combined with loose fiscal policy and tariffs, could accelerate inflation to 4%, dislodge expectations, and spike long-term yields.

Rajan argues that a central bank's independence is not guaranteed by its structure but by the political consensus supporting it. When political polarization increases, institutions like the Fed become vulnerable to pressure, as their supposed autonomy is only as strong as the political will to uphold it.

Uncertainty around the 2026 Fed Chair nomination is influencing markets now. The perceived higher likelihood of dovish candidates keeps long-term policy expectations soft, putting upward pressure on the yield curve's slope independent of immediate economic data.

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.

While the direct impact of tariffs may be temporary, the elongated process risks making consumers and businesses comfortable with higher inflation. Combined with questions about the Federal Reserve's political independence, this could unmoor expectations and make inflation persistent.

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.