Trump's Federal Reserve Ambitions Could Force RBA's Hand on Interest Rates
Economic experts are issuing stark warnings that the Reserve Bank of Australia could lose significant autonomy in setting interest rates if former President Donald Trump succeeds in his bid to assert control over the United States Federal Reserve. This unprecedented political manoeuvre could have severe global consequences, potentially forcing the RBA to implement rate cuts to combat a rapidly appreciating Australian dollar.
Legal Battle Threatens Central Bank Independence
The immediate threat stems from an upcoming Supreme Court hearing that will determine whether the US president possesses the authority to dismiss Lisa Cook, a sitting member of the Federal Reserve's board of governors. This legal challenge follows closely on the heels of a Department of Justice criminal investigation into current Fed Chair Jerome Powell, announced just ten days prior.
Sally Auld, chief economist at National Australia Bank, has articulated the grave implications of this situation. "If the court upholds Trump's efforts to sack Cook," Auld explains, "that could spell the beginning of the end of the central bank's independence." The consequences of Washington DC wresting control over monetary policy could be severe, ultimately leading to higher inflation both in the United States and internationally.
Potential Currency Crisis and Forced RBA Action
According to economic analysis, a politically compromised Federal Reserve would likely trigger a profound crisis of confidence in the American currency and financial assets, including stocks and bonds. The ramifications would extend far beyond US borders, affecting central banks worldwide.
In this worst-case scenario, Auld predicts "the magnitude of the depreciation of the US dollar would be quite significant." She elaborates on the direct impact for Australia: "If the Aussie dollar jumped 15%, that would make our currency expensive and that in itself might be enough to demand the RBA cut rates. Their hand could be forced."
Market Calm Belies Growing Concerns
Remarkably, financial markets have remained relatively untroubled by this unprecedented attack on Federal Reserve independence. Auld notes this calmness "feels a little bit out of sync with the way people are sensing the world at the beginning of 2026," suggesting investors may be underestimating the potential disruption.
The Federal Open Market Committee, which determines US interest rates, comprises twelve voting members: the seven Washington-based board of governors, the president of the Federal Reserve Bank of New York, and four rotating regional reserve bank presidents. The committee's next rate decision, due on 29 January Australian time, will be made under the shadow of the Department of Justice investigation into Powell.
Inflation Risks and Political Precedents
Shane Oliver, chief economist at AMP, warns that a politically controlled Fed could maintain artificially low interest rates for extended periods, potentially creating "an inflation blowout" that could devastate the US dollar and drive Wall Street lower. Like Auld, Oliver believes the consequence for Australia could be lower interest rates.
"A stronger Aussie dollar and lower interest rates; some Australians would think that's not a bad outcome," Oliver acknowledges. "But the risk would ultimately be more inflation." He considers the prospect of complete Trump control over the Fed as relatively distant, noting that achieving this would require control of at least four of the seven governors.
Regardless of the immediate outcome, Oliver emphasises that Trump's push to overturn decades of political support for central bank independence would establish a dangerous precedent for populists worldwide. "For Australia, the problem is that this is the world's most significant central bank," he states. "If the threats to independence are happening there, then it would happen here."
Australian Political Landscape and Institutional Vulnerabilities
The Australian political landscape already contains elements sympathetic to challenging central bank independence. The Greens' economic spokesperson, Nick McKim, last September demanded that Treasurer Jim Chalmers "show some courage" and exercise legislative powers to "directly override" the RBA and force rate cuts.
Meanwhile, populist figures on the right, such as rising Liberal politicians Andrew Hastie and Senator Jacinta Nampijinpa Price, might choose to follow Trump's lead, particularly if the RBA raises interest rates this year. Although unions have criticised the RBA for maintaining rates too high at the expense of jobs, they continue to publicly support its independence.
Oliver points out that Australia's institutional safeguards may already be weaker than those protecting the Federal Reserve. "To get a governor appointed in the US you have to go through a committee," he explains, "whereas here you are just appointed by the Treasurer."
Diverging Monetary Policy Paths
Luci Ellis, Westpac's chief economist and a former senior RBA official, offers a contrasting perspective, suggesting Australia should still be able to pursue independent monetary policy even if the American central bank becomes subordinated to political interests.
"There's no particular reason we have to follow what the Fed does," Ellis asserts, pointing to recent evidence of how the two countries' monetary policy paths have diverged. "It would be bad if the biggest and most powerful central bank lost some of its operational independence, but it would not in and of itself change how the RBA would need to behave."
As the legal and political battles unfold in Washington, Australian economists and policymakers are closely monitoring developments that could fundamentally reshape global monetary policy dynamics and force unexpected responses from the Reserve Bank of Australia.
