The Federal Reserve cuts interest rates but hides a deadly crisis! Trump controls independence, and the US dollar's credibility is counting down to collapse

The Federal Reserve’s expected 25 basis point rate cut in December did not lead to the anticipated “hawkish tone” in the market. Powell downgraded inflation prospects and announced that starting this month, the Fed will purchase $40 billion worth of short-term government bonds. However, “big short” Michael Burry warns that if Trump is determined to strengthen control over the Fed, this central bank “may be heading toward its end,” and an independence crisis could trigger a collapse in dollar confidence and chaos in asset markets.

Three Unexpectedly Doveish Signals and Market Interpretations

The Fed’s December rate cut of 25 basis points was in line with expectations, but upon announcement, U.S. stocks, gold, and Treasury bonds quickly rebounded. This is because the market had largely anticipated a “hawkish tone,” which did not materialize. Before the rate decision, the market had already consensus that a 25 basis point rate cut was almost certain: no doubt about that. However, the Fed would likely emphasize the need for caution moving forward, discouraging markets from prematurely betting on easing. Capital markets had already priced in this expectation: recently, the dollar index stabilized at a relatively strong level, gold fluctuated at high levels, U.S. stocks rose but with restraint, and U.S. Treasuries continued to decline.

Yet Powell’s commentary was unexpectedly dovish. He downgraded inflation outlooks, indicating that inflation would fall back in the second half of next year. More importantly, the Fed announced that starting this month, it will expand its balance sheet by buying $40 billion of short-term government bonds. This essentially means further easing of financial conditions. Overall, this rate meeting slightly exceeded market expectations, and many assets recovered their previous losses.

However, towards the close, market focus seemed to shift from Fed policy tone to political risks. Trump, after the meeting, called for doubling the rate cut, which the market interpreted as White House interference with the Fed. This suppressed the rally in stocks and gold at the close. This reversal revealed deeper concerns: short-term policy boosts cannot mask a long-term independence crisis.

Hassett’s “Shadow Chairman” Effect Has Already Festered

On November 25, U.S. Treasury Secretary Mnuchin said Trump is very likely to announce a Fed chair candidate before December 25. Trump subsequently stated in a White House speech that the shortlist had been narrowed down to one person. The market widely predicts that this “top candidate” is Kevin Hassett, chair of the White House Council of Economic Advisers. Hassett is seen as a typical “dove candidate” in the market, and once his “acting chairman” status becomes clear, markets tend to pay more attention to Hassett’s comments and attitude than to Powell’s departure.

In a sense, Hassett has become a “shadow chairman.” Before the rate meetings, Hassett said the Fed might need to take more easing actions, possibly lowering rates by 50 basis points or more, which has previously caused significant market volatility. This “dual chairman” situation is extremely rare and risky. When markets are uncertain about whom to listen to, expectations become chaotic, and asset prices distort.

On December 2, “big short” Michael Burry openly stated in a podcast that the Fed’s job is actually “the easiest thing in the world,” and warned further that if Trump is determined to tighten control over the Fed, the central bank “may be heading toward its end.” Meanwhile, some media and analysts view Hassett’s rise as a test of the Fed’s independence; others suggest that if the Fed becomes more aligned with the White House’s will, the credibility of the dollar could come under downward pressure.

Three Catastrophic Consequences of the Fed’s Collapse of Independence

Dollar Confidence Collapse: Global investors no longer believe the Fed will do the “right but unpopular” thing, undermining the dollar’s reserve currency status.

Inflation Out of Control Risk: Politicized monetary policy leaning toward short-term easing could repeat the stagflation of the 1970s.

Market Anchor Disappearance: The 10-year U.S. Treasury yield, as a global risk-free rate benchmark, would lose predictability, leading to asset price chaos.

Replaying the Painful Lessons of Nixon in the 1970s?

The historical lesson of the Fed losing independence is extremely painful. In the 1970s, during Nixon’s presidency, to win re-election, Nixon’s government strongly pressured the Fed to lower interest rates. Fed Chair Burns initially insisted on tightening policy to control high inflation, but under continuous White House pressure, the Fed eventually shifted to easing in 1971, gradually lowering rates. While low interest rates temporarily stimulated the economy, inflation remained high.

Worse, by 1973–1974, the oil crisis further drove up inflation, while economic growth stalled, leading the U.S. into stagflation. Stock and bond markets suffered simultaneously, asset prices fluctuated wildly, and the capital markets descended into chaos. Gold prices soared from $35 to $180 in 1974, a rise of over 400%. This period of intense political intervention is often associated with high inflation and asset crises.

The current situation bears startling similarities to the 1970s. Trump, needing short-term prosperity for midterm elections, and Hassett, as a dove candidate, fit this need perfectly. If Hassett takes over and pushes aggressive rate cuts, the economy and stock markets might benefit in the short term, but inflation could resurface strongly around 2026–2027. When that happens, large rate hikes to suppress inflation could trigger even more severe recessions and asset crashes.

The Fed’s independence not only concerns the U.S. domestic economy but also directly affects the dollar’s global standing. The dollar’s status as the world’s reserve currency largely depends on the global belief that the Fed will do “the right but unpopular” thing. Once its independence is compromised, global investors will worry: will the Fed abandon its inflation targets for political reasons? Is U.S. debt still a “risk-free asset”? Does the dollar still possess the strongest stability? These concerns could lead to decreased confidence in U.S. Treasuries and weaken the dollar’s international position.