The American economy is once again at the center of a heated debate, as fears of stagflation—an economic condition marked by both high inflation and high unemployment—resurface in the national conversation. The latest warning signs appeared in early August 2025, when the Michigan Index of Consumer Sentiment, a closely watched measure of how Americans feel about the economy, took a sharp tumble. This drop followed a disappointing jobs report released on August 1, which rattled markets and drew a swift, controversial response from President Donald Trump: he fired the head of the Bureau of Labor Statistics, a move that, according to The New York Times, only amplified the bad news and cast doubt on the credibility of future economic data.
These developments have stoked renewed concerns about the risks of stagflation—a term coined in Britain in the 1960s, but one that still resonates with Americans who remember the economic turmoil of the 1970s. According to The New York Times, there is growing evidence that recent tariffs and deportations are pushing up prices, compounding worries about a potential slowdown. The specter of stagflation is not just a theoretical concern; it has real implications for families, workers, and policymakers alike, as it represents a particularly vexing problem: inflation and unemployment rising in tandem, leaving central banks and governments with few good options.
To understand why these fears are mounting, it’s helpful to look at the broader economic backdrop. Over the past two decades, central banks like the Federal Reserve have rarely been out of the headlines. They were called upon to stabilize the financial system during the 2008-2009 crisis, then again during the COVID-19 pandemic of 2020-2021, when they acted to keep credit flowing and the economy afloat. But just as the world began to recover from the pandemic, a new challenge emerged: inflation. Beginning in mid-2021, retail prices surged, prompting the Fed and its international peers to hike interest rates to levels not seen since before the financial crisis. As The Atlantic reports, these higher rates have largely remained in place, even as inflation has shown signs of easing.
It’s against this backdrop that Donald Trump returned to the White House in January 2025. Sensitive to the pulse of the economy, Trump has been vocal in his desire for the Fed to aggressively lower interest rates, arguing that this would help sustain the expansion of the past two years—an expansion he himself has arguably put at risk through the introduction of new tariffs. However, the Fed has so far refused to budge, holding rates steady throughout 2025 after beginning a cautious reduction in 2024. This standoff has left Trump visibly frustrated. As he told Newsmax at the start of August, “I would remove [Jerome Powell] in a heartbeat, but they say it would disturb the market.” He’s also called Powell “always TOO LATE AND WRONG” on rate policy, underscoring the tension between the White House and the central bank.
Trump’s efforts to exert greater control over the Fed have not stopped at rhetoric. In February 2025, he signed Executive Order 14215, which increases presidential management over several federal agencies, including some of the Fed’s regulatory duties. However, the order does not touch the Fed’s prized autonomy in setting interest rates—a key element of its independence, which has been a cornerstone of U.S. economic policy since the Treasury-Fed Accord of 1951. That historic agreement, reached after years of conflict over government war financing and inflation, is widely considered the birth of Fed independence.
For decades, the rationale for central bank independence has been clear: monetary policy, particularly the setting of interest rates, is seen as a technical matter best left to experts, free from political interference. The idea is that politicians, motivated by short-term electoral concerns, might otherwise push for easy money policies that could stoke inflation or destabilize the economy. This principle was put to the test in the early 1980s, when then-Fed chair Paul Volcker raised interest rates to over 10%—despite fierce political pressure and public protest—to finally crush the inflation that had plagued the U.S. since the 1970s. Since then, the Fed has been expected to follow a “dual mandate” established by Congress in 1977: keep prices stable and seek maximum employment. In practice, though, the Fed has tended to prioritize price stability, typically targeting around 2% inflation since the 1990s.
Central banks have a variety of tools at their disposal to achieve these goals. Chief among them is the manipulation of interest rates. When the economy is overheating and prices are rising too quickly, central banks raise rates to make borrowing more expensive, cooling off both production and consumption. Conversely, when economic growth falters, they lower rates to encourage borrowing and spending. These policies, while seemingly straightforward, are anything but simple in practice. As The Atlantic points out, central banks also conduct open-market operations—buying and selling government debt to influence the supply of money and the cost of credit.
Yet, the independence of the Fed and other central banks is not absolute. While they operate independently within government, they are not independent of government itself. The president nominates members of the Fed’s governing board, including the chair, and Congress sets the bank’s mandate. Moreover, the relationship between central banks and private finance is intricate and sometimes contentious. Critics on the left argue that central banks are too closely aligned with the interests of private financial institutions, which tend to be more concerned with protecting the value of their assets from inflation than with broader economic goals like reducing unemployment. As David Solomon, CEO of Goldman Sachs, recently told CNBC, “With respect to monetary policy…central bank independence, Fed independence, is very important and it’s something we should fight to preserve.”
Others, however, question whether this independence truly serves the public interest. They point out that inflation can have complex effects: while it erodes the value of wealth for savers and creditors, it can also reduce the real burden of debt for households and governments. The debate is not merely academic; it goes to the heart of who benefits from monetary policy decisions, and who bears the risks when things go wrong. As the political scientist Jonathan Kirshner has observed, “the costs from macroeconomic policies that are a little too tight are unambiguous,” particularly in terms of high unemployment and stunted growth.
Trump’s recent actions—his firing of the Bureau of Labor Statistics head, his threats against Jerome Powell, and his executive order targeting the Fed’s regulatory functions—have brought these questions into sharp relief. While he may not be seeking to democratize monetary policy, his confrontational approach has forced a national reckoning with the political nature of money and the management of the economy. The challenge, as political theorist Leah Downey notes, is to “accept that monetary policy is complex and technical and requires expertise without concluding it is either too important or too complex for democratic politics.”
As Americans watch the unfolding drama between the White House and the Fed, the stakes could hardly be higher. The risk of stagflation is real, and the choices made in the coming months—about interest rates, economic data, and the independence of key institutions—will shape the nation’s economic future. For now, the debate continues, with no easy answers in sight.
