Federal Reserve Independence Crisis: The Global Financial Lifeline Faces Political Tests

The U.S. Department of Justice has initiated legal proceedings against Federal Reserve Chair Jerome Powell, an action that is shaking the confidence in the reliability of the international central banking system towards the Federal Reserve. When the independence of the Fed is challenged by political forces, the key mechanism that the global financial system relies on—currency swap agreements—also faces unprecedented risks. This tool, which is considered a lifeline for global finance, is now shrouded in uncertainty due to the shadow of political interference.

Currency Swap Agreements: Lifeline in Times of Crisis

Currency swap agreements are a special cooperation mechanism among central banks, through which the Federal Reserve provides dollar liquidity support to other central banks worldwide. During the 2008 global financial crisis, this mechanism saved countless financial institutions in distress; during the outbreak of COVID-19, it once again became a lifeline for economies around the world. History has proven that this swap system is the lifeline that stabilizes the global financial order.

However, if this originally neutral financial tool becomes entangled in geopolitical games, its effectiveness in responding to crises will be severely compromised. Increasingly, central banks worry that once the Fed’s independence is compromised, this financial lifeline could be politicized and exploited.

How Political Risks Threaten the U.S. Dollar Liquidity System

Political pressure exerted by the Trump administration on the Federal Reserve has already raised high alert among European officials. Last year, European countries began discussing alternative arrangements for dollar swap lines—not because they want to abandon the dollar, but because they no longer fully trust the purity of this mechanism. If central bank policies are hijacked by politics, providing liquidity support to other countries could come with geopolitical conditions.

These concerns are not unfounded. If the U.S. ties currency swap agreements to national interests, the effectiveness of global crisis response could be seriously undermined. Whether central banks can obtain urgently needed dollar liquidity during crises may depend on political stances rather than financial needs, which would fundamentally undermine the existing mutual financial support system.

New Challenges to the Global Financial Order

The crisis of the Federal Reserve’s independence essentially tests the trust foundation of the global financial system. The reason why currency swap agreements have played a lifeline role is that they are built on a consensus of central bank independence and transcend political influence. Once this consensus is broken, the ability to respond to financial crises globally will face unprecedented and severe challenges.

Responses from various central banks indicate that they are already preparing for the “worst-case scenario.” For the global economy, losing the security of this financial lifeline means that the next crisis could cause even greater damage.