On January 13, speaking at the Detroit Economic Club, Donald Trump declared that the United States had just delivered “the greatest first year in history.” Inflation, he said, was under control. Growth, he claimed, was booming.
Strictly speaking, the data did not entirely contradict him. U.S. consumer price inflation cooled more than expected in November and December 2025. Third-quarter GDP expanded at a robust 4.4% annualised pace, and the Atlanta Fed’s GDPNow model suggests fourth-quarter growth could exceed 5%.
Yet numbers alone tell only part of the story—and increasingly, a misleading one.
A 43-day government shutdown in the fourth quarter left large holes in the economic record. Several releases since then have been questioned for failing to capture the true state of demand, pricing pressure and household stress. Even the much-celebrated CPI prints were criticised for potentially understating inflation.
The deeper problem is not statistical noise. It is political pressure—direct, public and unprecedented—now bearing down on the Federal Reserve.
Just days before Trump’s Detroit speech, Fed chair Jerome Powell disclosed that he had been threatened with criminal prosecution by the Department of Justice. Powell, typically restrained to the point of caution, responded with an unusually blunt accusation: the White House, he suggested, was attempting to intimidate the central bank into submission.
Within 48 hours, a coalition of former Fed chairs, Treasury secretaries and leading economists issued a rare joint defence of central bank independence. European Central Bank president Christine Lagarde and other global policymakers added their names. Independence, the statement argued, is not an abstract principle—it is the foundation of price stability and public trust.
Markets wobbled, then shrugged. U.S. equities opened sharply lower but closed higher, buoyed by big-box retailers and megacap technology stocks. Wall Street, as ever, seemed more comfortable than Washington.
Voters were not.
The Economy That Works—Selectively
For much of 2025, the U.S. economy delivered what policymakers prize most: growth without collapse. But for many households, that growth felt theoretical.
In Manhattan over Christmas, the contrast was stark. Luxury department stores were packed. A few blocks away, long queues formed outside churches offering free meals. The image captured the essence of America’s K-shaped economy—one in which prosperity accelerates at the top while stagnation hardens below.
Consumer spending remains the primary engine of growth. In the third quarter, personal consumption contributed nearly 2.4 percentage points to GDP expansion, while net exports added another 1.6 points. Asset markets, particularly equities, continued to underpin demand among higher-income households. The Nasdaq surged in mid-2025, and earnings repeatedly beat expectations.
But for those without meaningful asset exposure, the story looks different.
Real income growth slowed. Job creation weakened sharply: non-farm payrolls rose by just 584,000 in 2025, down from 2 million the year before. Job openings fell by nearly a million year-on-year. The labour market drifted into an uncomfortable equilibrium—low hiring, low firing, low mobility.
At the same time, the costs that matter most to households—housing, utilities, insurance, healthcare—continued to rise. Electricity prices increased at roughly twice the pace of inflation. Heating bills climbed. Employers quietly shifted healthcare costs onto workers. Credit card delinquencies reached their highest level in more than a decade. Household debt hit a record $18.6 trillion.
The divergence is structural. Nearly half of all stocks and mutual funds are owned by the top 1% of Americans; the bottom half owns barely more than 1%. Rising markets cushion inflation for the wealthy. For everyone else, inflation compounds vulnerability.
This matters politically because the latter group forms the backbone of Trump’s electoral coalition.
Poll after poll shows inflation and cost of living as the dominant concern among voters, outweighing jobs, taxes and even healthcare. In local elections late last year, Democratic candidates capitalised on that anxiety with surprising success.
Faced with eroding approval ratings, Trump has pivoted—late and aggressively.
Executive Power as Monetary Policy
In rapid succession this January, the White House announced a ban on large institutional investors buying single-family homes, ordered Fannie Mae and Freddie Mac to purchase $200bn of mortgage-backed securities, and floated a one-year cap on credit card interest rates at 10%.
Taken together, these measures amount to something novel: an attempt to engineer a rate cut without the Federal Reserve.
The problem is scale and mechanism. A $200bn bond purchase is small relative to past quantitative easing and unlikely to move mortgage rates by more than a few basis points. Lower rates, if they materialise, risk stoking demand without addressing chronic housing undersupply. A vague ban on “large institutional investors,” still undefined, offers more political theatre than immediate relief.
Meanwhile, the banking industry has quietly ignored the proposed credit-card cap. Enforcement remains unclear. Legal authority is uncertain.
Trump’s frustration is understandable. Mortgage rates remain elevated. Home prices sit at record highs relative to income. Housing affordability has deteriorated beyond the peaks of the pre-2008 bubble. But executive orders cannot substitute for monetary credibility—or supply-side reform.
Which brings the conflict back to the Fed.
A Central Bank on Trial
In its 113-year history, the Federal Reserve has endured political pressure. It has never faced something quite like this.
Since returning to office, Trump has treated rate cuts not as a policy debate but as a personal entitlement. His efforts to remove or marginalise dissenting Fed officials—including a contested attempt to dismiss governor Lisa Cook—have raised constitutional questions now before the Supreme Court.
Markets understand the stakes. With interest payments consuming roughly 14% of federal spending, monetary policy has become fiscally existential. Lower rates ease budget strain. Higher rates expose it.
Trump has promised to name a new Fed chair imminently. The shortlist includes technocrats and loyalists alike. Investors clearly prefer the former. Bond markets, less forgiving than equities, are signalling concern that political dominance over the Fed would undermine long-term price stability—and the dollar itself.
The irony is that even a compliant chair may not deliver what Trump wants. The Fed controls short-term rates, not mortgage rates. Long-term yields respond to inflation expectations, fiscal credibility and global capital flows. Undermine those, and borrowing costs may rise, not fall.
Growth Without Resolution
Looking ahead to late 2026, the U.S. economy may well accelerate. Fiscal stimulus from the “Big and Beautiful Act” is kicking in. Monetary policy has already loosened. AI-led investment continues to surge.
But growth alone will not heal a divided economy.
Without relief on housing supply, healthcare costs and basic affordability, faster growth risks widening inequality rather than easing it. Aggressive rate cuts could reignite inflation, punishing those least able to absorb it. Judicial threats against the Fed risk destabilising the dollar and long-term capital flows.
The central question is no longer whether the U.S. economy can grow. It is whether it can do so without sacrificing institutional credibility.
In that sense, the real test of American economic strength in 2026 will not be GDP prints or equity indices. It will be whether the Federal Reserve retains the independence to do the one thing politicians cannot: make unpopular decisions when stability demands it.
From where I stand, the numbers may still look strong—but the foundations are starting to creak.
When Monetary Independence Becomes the Real Economic Risk
What troubles me most is not that the U.S. economy may slow—or even that inflation could return. Economies cycle. Policy mistakes happen.
What is genuinely new is the erosion of boundaries.
The Federal Reserve was designed to be unpopular when necessary. Its legitimacy rests not on growth headlines or election calendars, but on its ability to resist precisely the kind of pressure now being applied. Once that resistance weakens, monetary policy stops being a stabiliser and starts becoming an accelerant.
Trump’s instinct is to treat interest rates as a lever of executive power, something to be pulled hard enough and often enough until outcomes comply. That approach misunderstands how modern financial systems work. Markets price credibility, not commands. They respond to institutional strength, not political volume.
Even if a more pliant Fed chair delivers short-term rate cuts, the longer-term cost could be higher borrowing premiums, a weaker dollar, and more volatile capital flows. Those costs do not show up immediately in CPI releases or GDP trackers—but they surface eventually, and they surface painfully.
America’s real vulnerability is not its debt level or its growth mix. It is the temptation to trade institutional independence for short-term political relief. Once that trade is made, it is exceedingly difficult to reverse.
From where I sit, the risk is no longer that the Federal Reserve tightens too much. It is that, when the next inflation shock arrives, it may no longer be free to tighten at all.
That would mark a far more consequential break than any single election cycle—and one the U.S. economy has never truly had to price before.