credibility

Across advanced and emerging economies, central bankers are confronting an increasingly assertive political class. Populist leaders and fiscally strained governments are pressing for lower interest rates, easier financing and, in some cases, greater influence over monetary authorities themselves.

The response from central banks has been firm but not without risk. In defending their independence, they risk appearing political, blurring the very boundary they are trying to protect.

The U.S.: Digging In at the Federal Reserve

In the United States, the confrontation has been direct. Jerome Powell has faced repeated criticism from President Donald Trump over interest rates, with Trump arguing that tighter policy undermines economic growth.

Rather than soften its stance, the Federal Reserve has emphasized its legal independence and data-driven approach. Powell has repeatedly stressed that decisions will be based on inflation and employment data, not political preference.

The stakes are high. With U.S. federal debt at $36 trillion and large refinancing needs ahead, pressure to keep borrowing costs low is intensifying. Any perception that the Fed is yielding to political demands could unsettle bond markets and erode confidence in its anti-inflation mandate.

Europe: Pre-Emptive Exits and Institutional Defense

In Europe, resistance has taken a subtler form. François Villeroy de Galhau is stepping down from the Bank of France months before elections that polls suggest could benefit the far right. Though officially described as a personal decision, the move is widely seen as an attempt to preserve institutional continuity before a potential political shift.

Similarly, Christine Lagarde has not ruled out the possibility of leaving the European Central Bank before completing her term, even while stating her baseline intention is to stay.

Such pre-emptive departures highlight a paradox: central banks are trying to shield themselves from politicization, yet early resignations can themselves be interpreted as political maneuvers. Critics argue this risks undermining the perception of neutrality.

European institutions are legally insulated by treaties, but they are not immune to democratic pressures particularly as high debt levels in countries such as France and Italy fuel debates over whether central banks should help finance public spending.

Japan: Market Discipline as a Shield

At the Bank of Japan, the dynamic is slightly different. Prime Minister Sanae Takaichi appointed dovish economists to the board, a move seen by some as an effort to temper rate hikes.

Yet the BOJ has maintained its commitment to policy normalization. In Japan’s case, currency markets have provided reinforcement. A weakening yen during earlier periods of ultra-loose policy heightened political sensitivity to inflation risks. Market volatility effectively strengthened the central bank’s hand, illustrating how investor reactions can discipline governments as well as monetary authorities.

Why Independence Matters

The battle is about more than institutional pride. Central bank independence emerged in the late 20th century as a response to the inflationary spirals of the 1970s. Countries that subordinated monetary policy to political cycles often experienced runaway prices and capital flight.

More recent examples underscore the danger. In countries such as Turkey and Argentina, political interference in rate-setting has coincided with surging inflation and currency instability.

For advanced economies now grappling with record sovereign debt and rising defense spending, the temptation to lean on central banks is clear. Lower rates ease fiscal pressure. But if investors believe policy is being distorted for political convenience, borrowing costs may ultimately rise rather than fall.

The Blurred Line Between Mandate and Mission Creep

The past decade has complicated the picture. Massive bond-buying programs during the global financial crisis and the pandemic pulled central banks deeper into fiscal territory. In Europe and Britain, limited climate-related initiatives sparked accusations of overreach.

Critics argue that such expansions of mandate have made central banks more politically visible and therefore more vulnerable.

This creates a delicate trade-off. Remaining silent in the face of political pressure may preserve appearances but risk policy distortion. Publicly resisting may safeguard inflation credibility but invite accusations of entering the political arena.

Markets as Final Arbiter

Ultimately, financial markets may determine how much room politicians have to maneuver. Governments can pressure central banks, but they cannot easily compel investors to finance deficits at artificially low rates.

If markets sense that independence is eroding, they may demand higher yields, weaken currencies or pull capital outcomes that raise inflation and undermine growth. In that sense, investor discipline can reinforce central bank autonomy more effectively than legal protections alone.

A Costly Defense

Central bankers today face a more hostile and fragmented political landscape than their predecessors. The old assumption that technocrats could quietly manage inflation while politicians handled everything else no longer holds.

By fighting back, they defend hard-won credibility. But in doing so, they risk appearing as participants in political struggles rather than neutral arbiters of economic stability.

The challenge is no longer simply setting interest rates. It is preserving trust in institutions designed to stand above politics at a time when politics increasingly refuses to stand aside.

With information from Reuters.

WASHINGTON — Amid the chaos in Kabul, politicians and pundits have declared the Taliban’s victory in Afghanistan a defeat from which U.S. influence may never recover.

“Biden’s credibility is now shot,” wrote Gideon Rachman, chief oracle of Britain’s Financial Times.

“A grave blow to America’s standing,” warned the Economist.

But take a deep breath and remember some history.

When South Vietnam collapsed after a war that involved four times as many U.S. troops, many drew the same conclusion: The age of U.S. global power was over.

Less than 15 years later, the Berlin Wall came down, the Cold War began to end, and the United States soon stood as the world’s only superpower.

The lesson: A debacle like the defeat in Kabul — or the one in Saigon two generations earlier — doesn’t always prevent a powerful country from marshaling its resources and succeeding.

I’m not dismissing the tragedy that has befallen the Afghans or the damage that U.S. credibility has suffered. When President Biden told a news conference that he had “seen no questioning of our credibility from allies,” he sounded as if he was in denial — or, perhaps worse, out of touch.

No questioning? How about the question from Tobias Ellwood, chairman of the British Parliament’s defense committee: “Whatever happened to ‘America is back’?”

Or the complaint from Armin Laschet, the German conservative who could be his country’s leader after elections next month: “The greatest debacle NATO has experienced since its founding.”

Whether he likes it or not, Biden has repair work to do.

The first step, already underway, is making sure the endgame in Kabul doesn’t get any worse.

That means keeping U.S. troops on the ground until every American is out, as Biden has promised. It also requires an energetic effort to evacuate Afghans who worked with the U.S. government and other institutions, even if that requires risking the lives of some American troops. Those Afghans trusted us; if we abandon them, it will be a long time before we can credibly ask the same of anyone else.

And, of course, the administration needs to prevent Al Qaeda and other terrorist groups from replanting themselves in Taliban-ruled Afghanistan. If the United States fails at that — the original reason we invaded the country almost 20 years ago — Biden’s decision to withdraw will justly be judged a fiasco.

There’s repair work to do beyond Afghanistan, too.

“We’ve got to show that it would be wrong to see American foreign policy through the lens of Afghanistan,” Richard N. Haass, president of the nonpartisan Council on Foreign Relations and a former top State Department official, told me.

The United States has more important interests that need attention and allies that need reassurance, he said.

“The most important thing is to deter our major foes,” he said, referring to China, Russia and Iran.

“This is a moment to strengthen forces in Europe, mount more freedom of navigation operations [by the U.S. Navy] in the South China Sea,” he said. “This is a good time to say we’re serious about our commitment to Taiwan,” which China periodically threatens.

Biden took a step in that direction in his recent interview with ABC’s George Stephanopoulos, listing Taiwan along with South Korea and Japan as places where the U.S. “would respond” to an attack.

If anything, Haass and other foreign policy veterans say, the questions about American credibility are likely to make Biden react more strongly to the next few challenges overseas.

“The most intriguing question is what effect this episode has on Biden’s thinking,” suggested Aaron David Miller of the Carnegie Endowment for International Peace. “Will he think: ‘I’ve got to be tougher with the Iranians now? Do I have to signal to a country like Taiwan that I’m prepared to protect American interests there?’”

But the notion that American influence has been fatally damaged is overblown, he argued.

“There have been many other instances in which U.S. credibility has been diminished, but our phone continues to ring,” Miller said.

Biden and his aides already know most of this. The premises of his foreign policy — reviving U.S. domestic strength, revitalizing U.S. alliances, and focusing on vital interests like China and Russia — provide a foundation for recovery.

“My dad used to have an expression: If everything is equally important to you, nothing is important to you,” the president said last week. “We should be focusing on where the threat is the greatest.”

The test Biden faces now is whether he can execute that strategy — and show that he’s credible where it matters most — more successfully than in his botched withdrawal from an unwinnable war.