For over 110 years, the Federal Reserve (the Fed) has operated at a deliberate distance from the White House and Congress.

It is the only federal agency that doesn’t report to any single branch of government in the way most agencies do, and can implement policy without waiting for political approval.

These policies include interest rate decisions, adjusting the money supply, emergency lending to banks, capital reserve requirements for banks, and determining which financial institutions require heightened oversight.

The Fed can act independently on all these critical economic decisions and more.

But why does the US government enable this? And why is it that nearly every major economy has adopted a similar model for their central bank?

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The foundation of Fed independence: the panic of 1907

The Fed was established in 1913 following the Panic of 1907, a major financial crisis. It saw major banks collapse, the stock market drop nearly 50%, and credit markets freeze across the country.

At the time, the US had no central authority to inject liquidity into the banking system during emergencies or to prevent cascading bank failures from toppling the entire economy. 

J.P. Morgan personally orchestrated a bailout using his own fortune, highlighting just how fragile the US financial system had become.

The debate that followed revealed that while the US clearly needed a central bank, politicians were objectively seen as poorly positioned to run it.

Previous attempts at central banking had failed partly due to political interference. Presidents and Congress had used monetary policy to serve short-term political goals rather than long-term economic stability.

So it was decided that a stand-alone body responsible for making all major economic decisions would be created. Essentially, the Fed was created because politicians, who face elections and public pressure, couldn’t be relied upon to make unpopular decisions when needed for the long-term economy.

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How does Fed independence work?

Although the Fed is designed to be an autonomous body, separate from political influence, it still has accountability to the US government (and thereby US voters). 

The President is responsible for appointing the Fed Chair and the seven Governors of the Federal Reserve Board, subject to confirmation by the Senate. 

Each Governor serves a 14-year term, and the Chair serves a four-year term. The Governors' terms are staggered to prevent any single administration from being able to change the entire board overnight.

Beyond this “main” board, there are twelve regional Federal Reserve Banks that operate across the country. Their presidents are appointed by private-sector boards and approved by the Fed's seven Governors. Five of these presidents vote on interest rates at any given time, alongside the seven Governors.

This creates a decentralised structure where no single person or political party can dictate monetary policy. Changing the Fed's direction requires consensus across multiple appointees from different administrations.

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The case for Fed independence: Nixon, Burns, and the inflation hangover

The strongest argument for keeping the Fed independent comes from Nixon’s time as president in the 1970s.

Nixon pressured Fed Chair Arthur Burns to keep interest rates low in the lead-up to the 1972 election. Burns complied, and Nixon won in a landslide. Over the next decade, unemployment and inflation both rose simultaneously (commonly referred to now as “stagflation”). 

By the late 1970s, inflation exceeded 13 per cent, Nixon was out of office, and it was time to appoint a new Fed chair.

That new Fed chair was Paul Volcker. And despite public and political pressure to bring down interest rates and reduce unemployment, he pushed the rate up to more than 19 per cent to try to break inflation. 

The decision triggered a brutal recession, with unemployment hitting nearly 11 per cent. 

But by the mid-1980s, inflation had dropped back into the low single digits. 

Volcker stood firm where non-independent politicians would have backflipped in the face of plummeting poll numbers.

The “Volcker era” is now taught as a masterclass in why central banks need independence. The painful medicine worked because the Fed could withstand political backlash that would have broken a less autonomous institution.

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Are other central banks independent? 

Nearly every major developed economy has an independent central bank. The European Central Bank, Bank of Japan, Bank of England, Bank of Canada, and Reserve Bank of Australia all operate with similar autonomy from their governments as the Fed.

However, there are examples of developed nations that have moved away from independent central banks.

In Turkey, the president forced its central bank to maintain low rates even as inflation soared past 85 per cent. The decision served short-term political goals while devastating the purchasing power of everyday people.

Argentina's recurring economic crises have been exacerbated by monetary policy subordinated to political needs. Venezuela's hyperinflation accelerated after the government asserted greater control over its central bank.

The pattern tends to show that the more control the government has over monetary policy, the more the economy leans toward instability and higher inflation.

Independent central banks may not be perfect, but they have historically outperformed the alternative.

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Why do markets care about Fed independence?

Markets generally prefer predictability, and independent central banks make more predictable decisions.

Fed officials often outline how they plan to adjust policy and what their preferred data points are. 

Currently, the Consumer Price Index (CPI), Personal Consumption Expenditures (PCE) index, Bureau of Labor Statistics (BLS) monthly jobs reports, and quarterly GDP releases form expectations about the future path of interest rates.

This transparency and predictability help businesses map out investments, banks to set lending rates, and everyday people to plan major financial decisions.

When political influence infiltrates these decisions, it introduces uncertainty. Instead of following predictable patterns based on publicly released data, interest rates can shift based on electoral considerations or political preference, which makes long-term planning more difficult.

The markets react to this uncertainty through stock price volatility, potential bond yield rises, and fluctuating currency values.

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The enduring logic

The independence of the Federal Reserve is about recognising that stable money and sustainable growth require institutions capable of making unpopular decisions when economic fundamentals demand them.

Elections will always create pressure for easier monetary conditions. Inflation will always tempt policymakers to delay painful adjustments. And the political calendar will never align perfectly with economic cycles. 

Fed independence exists to navigate these eternal tensions, not perfectly, but better than political control has managed throughout history.

That's why this principle, forged in financial panics and refined through successive crises, remains central to how modern economies function. And it's why debates about central bank independence, whenever they arise, touch something fundamental about how democracies can maintain long-term prosperity.

The ASX 200 closed out the 2025 financial year on a high, reaching a new intra-month peak of 8,592 in June and within touching distance of the all-time record. The index delivered a 1.4% total return for the month, rounding off a strong final quarter with a 9.5% return and locking in a full-year gain of 13.8% — its best performance since 2021.This strong finish all came down to the postponement of the Liberation Day tariffs. From the April 7 lows through to the end of the financial year, the ASX followed the rest of the world. Mid-cap stocks were the standout performers, beating both large and small caps as investors sought growth opportunities away from the extremes of the market. Among the sectors, Industrials outperformed Resources, benefiting from more stable earnings and supportive macroeconomic trends tied to infrastructure and logistics.But the clear winner was Financials, which contributed an incredible 921 basis points to the overall index return. CBA was clearly the leader here, dominating everything with 457 basis points on its own. Westpac, NAB, and others also played a role, but nothing even remotely close to CBA. The Industrials and Consumer Discretionary sectors made meaningful contributions, adding 176 and 153 basis points, respectively. While Materials, Healthcare, and Energy all lagged, each detracting around 45 to 49 basis points. Looking at the final quarter of the financial year, Financials were by far the biggest player again, adding 524 basis points — more than half the quarter’s total return of 9.5%. Apart from a slight drag from the Materials sector, all other parts of the market made positive contributions. Real Estate, Technology, and Consumer Discretionary followed behind as key drivers. Once again, CBA was the largest individual contributor, adding 243 basis points in the quarter, while NAB, WBC, and Macquarie Group added a combined 384 basis points. On the other side of the ledger, key underperformers included BHP, CSL, Rio Tinto, Treasury Wine Estates, and IDP Education, which all weighed on quarterly performance.One of the most defining features of the 2025 financial year was the dominance of price momentum as a market driver — something we as traders must be aware of. Momentum strategies far outpaced more traditional, fundamental-based approaches such as Growth, Value, and Quality. The most effective signal was a nine-month momentum measure (less the most recent month), which delivered a 31.2% long-short return. The more commonly used 12-month price momentum factor was also highly effective, returning 23.6%. By contrast, short-term reversals buying last month’s losers and selling last month’s winners was the worst-performing approach, with a negative 16.4% return. Compared to the rest of the world, the Australian market was one of the strongest trades for momentum globally, well ahead of both the US and Europe, despite its relatively slow overall performance.Note: these strategies are prone to reversal, and in the early days of the new financial year, there has been a notable shift away from momentum-based trading to other areas. Now is probably too early to say whether this marks a sustained change, but it cannot be ignored, and caution is always advised.The second big story of FY26 will be CBA. CBA’s growing influence was a key story of FY25. Its weight in the index rose by an average of 2.1 percentage points across the year, reaching an average of 11.5% by June. That helped push the spread between the Financials and Resources sectors to 15.8 percentage points — the widest gap since 2018. Despite the strong cash returns, market valuations are eye-watering; at one point during June, CBA became the world’s most expensive bank on price metrics. The forward price-to-earnings multiple now sits at 18.9 times. This is well above the long-term average of 14.7 and higher than the 10-year benchmark of 16.1. Meanwhile, the dividend yield has slipped to 3.4%, down from the historical average of 4.4%. Earnings momentum remains soft, with FY25 growth estimates still tracking at 1.4%, and FY26 forecast at a moderate 5.4%. This suggests that recent gains have come more from expanding valuation multiples than from actual earnings upgrades, making the August reporting date a catalyst day for it and, by its size, the market as a whole.On the macro front, attention now turns to the Reserve Bank of Australia. The central bank cut the cash rate by 25 basis points to 3.6% at its July meeting. Recent commentary from the RBA has taken on a more dovish tone, with benign inflation data and ongoing global uncertainty expected to outweigh the strength of the labour market. The RBA appears to be steering toward a neutral policy stance, and markets will be watching for further signals on how that shift will be managed. Recent economic data has been mixed. May retail sales were weaker than expected, while broader household spending indicators held up slightly better. Building approvals saw a smaller-than-hoped-for bounce, employment remains strong, but productivity is low. Inflation is now at a 3-year low and falling; all this points to underlying support from the RBA’s easing bias both now and into the first half of FY26.As we move into FY26, the key questions are:

1. Can fundamentals wrestle back control over momentum?
2. Will earnings growth catch up to price to justify valuations?
3. How will policy decisions from the RBA and other central banks shape investor sentiment in an ever-volatile world?

While the early signs suggest a possible rotation, the jury is still out on whether this marks a new phase for the Australian market or just a brief pause in the rally that defined FY25.

1. Inflation Uncertainty

While recent data has shown core inflation moderating, core PCE is on track to average below target at just 1.6% annualised over the past three months.Federal Reserve Chair Jerome Powell made clear that concerns about future inflation, especially from tariffs, remain top of mind.“If you just look backwards at the data, that’s what you would say… but we have to be forward-looking,” Powell said. “We expect a meaningful amount of inflation to arrive in the coming months, and we have to take that into account.”While the economy remains strong enough to buy time, policymakers are closely monitoring how tariff-related costs evolve before shifting policy. Powell also stated that without these forward-looking risks, rates would likely already be closer to the neutral rate, which is a full 100 basis points from current levels.

2. The Unemployment Rate anchor

Powell repeatedly cited the 4.2% unemployment rate during the press conference, mentioning it six times as the primary reason for keeping rates in restrictive territory. At this level, employment is ahead of the neutral rate.“The U.S. economy is in solid shape… job creation is at a healthy level,” Powell added that real wages are rising and participation remains relatively strong. He did, however, acknowledge that uncertainty around tariffs remains a constraint on future employment intentions.If not for a decline in labour force participation in May, the unemployment rate would already be closer to 4.6%. Couple this with the continuing jobless claims ticking up and hiring rates subdued, risks are building around labour market softening.

3. Autumn Meetings are Live

While avoiding firm forward guidance, Powell hinted at a timeline:“It could come quickly. It could not come quickly… We feel like the right thing to do is to be where we are… and just learn more.”This suggests the Fed will remain on hold through the July meeting, using the summer to assess incoming data, particularly whether tariffs meaningfully push inflation higher. If those effects prove limited and unemployment begins to rise, the stage could be set for a rate cut in September.