If there had been any doubt that the Federal Reserve is under unprecedented political pressure, this week's incendiary commentary from former New York Fed President William Dudley cemented the notion.
Where once the heat had been coming primarily from President Donald Trump and his demand for rate cuts, the latest round emanated from the other side — a prominent one-time central banker who urged defiance and even tried to nudge the central bank into a political fray that its members have been trying assiduously to avoid.
What results is that the Fed and its long-held independence crucial to its decision-making are facing a test perhaps like never before.
"Everything they say and everything they do is going to be viewed through the prism of this titanic battle," said Greg Valliere, chief global strategist at AGF and a veteran markets and politics analyst. "What I sense in the last few days is a growing desire among current and former Fed officials to fight back."
Dudley's comments came amid a series of public statements that are out of character for normally staid central bankers who have a long history of not using public forums to tell each other what to do.
For instance, former Fed Chair Janet Yellen, Powell's immediate predecessor, recently said the Fed should consider a rate cut, just days before Powell and Co. did just that.
Earlier this month, Yellen and former Chairmen Alan Greenspan Ben Bernanke and Paul Volcker penned a remarkable op-ed for The Wall Street Journal stressing the need for an independent Fed free of political pressure. While the missive did not mention Trump and his criticisms specifically, the intention was clear.
Of course, it's also unusual for presidents to criticize the Fed as forcefully as Trump has, though his frequent tweets hammering at Fed Chairman Jerome Powell and his colleagues have quickly become routine.
But Dudley's commentary for Bloomberg Opinion seemed to put the dialogue on a different plane. He is someone who held one of the Fed's most influential positions and not only stated a position on rate cuts — he's against — but also encouraged holding the line as a way to spite Trump and perhaps torpedo his reelection chances next year.
"After all, Trump's reelection arguably presents a threat to the U.S. and global economy, to the Fed's independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020," he wrote.
Reaction is swift
The commentary drew widespread attention around Wall Street and on social media, most of it was negative.
Hedge fund titan Kyle Bass called Dudley "rogue."
Bear Traps Report founder Lawrence McDonald wondered if Dudley was speaking for more than himself and perhaps was representing the sentiment of Powell and others at the Fed.
And Ed Yardeni, founder of Yardeni Research, marveled at just how far the public scrutiny of Fed actions has gone.
"I am almost speechless," he wrote in his morning note to clients Wednesday. "Dudley may be calling on the Fed to join the resistance and to fight fire with fire, but that would be playing with fire for the Fed. Welcome to the New Abnormal, where everyone loses their minds! Trump has the amazing ability to make sane people go insane."
The essay also elicited a rare public response from the Fed to criticism, with a spokesman saying that "political considerations play absolutely no role" in making monetary policy.
Dudley, a registered Democrat and former Goldman Sachs economist, did not respond to a request for further comment.
Powell 'just has to blow it off'
The latest flare-up in the Fed debate raised more questions about whether the central bank can stay above the fray.
"I think it's an incredibly irresponsible thing for Dudley to write," said Steve Blitz, chief U.S. economist at TS Lombard. "For him to do that, it just creates an unnecessary amount of turmoil at a time when there's already too much turmoil."
There actually is some precedent, however remote, of a central bank chair taking on a U.S. president. Nicholas Biddle and then-President Andrew Jackson squared off in the early 19th century, according to research from AB Bernstein, in a battle for the survival of what was then called the Bank of the United States.
This time around, though, the stakes are quite different, with Trump blaming the Fed for holding back growth and not helping in the U.S.-China trade war. In a tweet last Friday, Trump suggested Powell is an "enemy" of the country along the lines of Chinese President Xi Jinping.
"I think that's irresponsible," Blitz said of the "enemy" label. However, "all Dudley does by writing what he did was add fuel to the fire. Sometimes you fight fire with water, you don't fight fire with fire."
As for Powell, he'll have to continue to show the market that he can do his job regardless of where the fire is coming from. He has repeatedly said that politics are not discussed at Fed meetings, though that insistence may get harder to sell in the days ahead.
"He just has to blow it off, at least officially. He just has to focus on what his job is," said Quincy Krosby, chief market strategist at Prudential Financial. "All the gloves seem to be coming off."