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Forbes
a day ago
- Business
- Forbes
Is The Independence Of The Federal Reserve In Danger?
In ancient Greece the 'Titanomachy' was a battle between the Olympian gods (like Zeus) and the older gods, the Titans. Once victorious, Zeus condemned his vanquished opponents, notably Atlas, who was forced to carry the burden of the heavens, for eternity. Though it is a stretch of the comparison that classical scholars should not forgive, when thinking of Atlas' feat of endurance, I have central banks in mind, and in particular of the Federal Reserve, which has especially in the past fifty years borne the weight of investor expectations and the hopes of politicians. The importance of the Fed cannot be underestimated – academics have shown that returns, volatility and trading volumes are higher than average around the Federal Open Markets Committee meeting. The Fed has been at the epicentre of every financial crisis rescue effort through the globalization era – from the Asian, Russia and LTCM crises, to the global financial crisis where the intellectual burden of finding a way of mending markets was shouldered by Ben Bernanke, to the recent responsiveness of the institution during COVID. If anything, the Fed has been guilty of doing too much in recent years, and the consequences of its long deployment of quantitative easing are still becoming evident. On one hand, the large central banks, led by the Fed, are the glue that has kept the political economic peace throughout this thirty or so year period, but on the other, this peace has permitted the accumulation of huge amounts of debt, and has shielded politicians from the fiscal consequences of their actions. Now, the independence of the Fed may be about to be sacrificed, as the president appoints Stephen Miran to replace Adriana Kugler who is stepping down, and a prospective chair to replace Jerome Powell who is due to step down in a year's time as head of the Fed. The unwritten assumption is that, like never before, the Fed's rate setting committee will sway to the mood of the White House. This is problematic at many levels. The suite of policies enacted by the president – from deportation to tariffs – means that the US economy is now suffering from stagflation (sticky inflation and low growth). Strip away the blinding effect of wild investment in AI and corporate America looks like corporate Europe. Stagflation is difficult for investors and central banks to navigate, and markets are pricing out rate cuts from this Fed. Indeed, this is a very strange rate cycle. Historically, the Fed leads rate cutting cycles and other central banks follow, but the Bank of England, ECB, Royal Bank of Canada and other smaller central banks like the SNB, have been hacking away at rates whilst the Fed has not moved this year. In the long-term, the potential politicisation of the Fed will augment uncertainty. There is already talk in central banking circles that in the event of a financial crisis, the politicised Fed may not be willing to open swap lines with other central banks, which if it occurred would deepen the economic effects of any crisis. Swap lines across the international financial system have been staples of past rescues, and articles of faith for scholars of monetary systems like Charles Kindleberger. In such a context, the Fed's job as lender to (US) banks might also become more complex and ineffective if the large banks were to behave in the same way that the technology companies are now doing (Apple looks to have escaped tariffs by presenting a gift to the president in the White House and promising to invest USD 600bn in the US – it currently invests about USD 43bn). So, in a financial crisis, a large American bank could offer a large loan to the Trump family to extend the Mar-a-Lago resort, if the president sanctioned its main national and international rivals (cynics will ask whether something similar happened in 2009). My hunch is that beyond the thrill of lower interest rates (which will likely raise inflation and long-term bond yields), the vision that Trump has in mind for the Fed is something along the lines of the Bank of Japan, which in the past ten years has effectively swallowed the Japanese bond market (the BoJ owns just over 50% of the Japanese bond market). Having the Fed as a monetary hoover to keep bond yields stable will help to dampen some of the risks of indebtedness, but will store up greater risks for later. The appointment of a 'yes-man' at the head of the Fed (Kevin Hassett fits this role much more than the other leading candidate Kevin Warsh), will likely spur resistance within the institution, and across the regional Fed banks whose presidents help to make up the rate setting committee. Not only will Fed employees – who are devoted to the institution – worry for their jobs (witness the hollowing out of the Bureau for Labour Statistics), but they will be concerned that the entire macro-landscape is being undermined – by weaker institutions, unreliable data, crypto and other 'new' money experiments, the acceptance of corruption and more volatile assets. The ultimate objective of 'politicising' the Fed, if that is what is at stake, is to make sure that the next crisis doesn't happen on Donald Trump's watch. The risk is that when that crisis does happen, the Fed will be part of the problem rather than the solution.
Forbes
27-07-2025
- Business
- Forbes
Ben Bernanke And Janet Yellen's Inflation Mystification Ails The Fed
WASHINGTON, DC - DECEMBER 10: Federal Reserve Board Chairman Ben Bernanke (L) and Janet Yellen (R), ... More Vice Chair and President Obama's nominee fto succeed Bernanke, listen during a meeting of the Board of Governors of the Federal Reserve System to discuss the final version of the so-called "Volcker Rule" December 10, 2013 in Washington, DC. The rule was adopted unanimously during the meeting that will ban proprietary trading by large banks. (Photo by) Fed officials don't grasp what inflation is. If they understood what it is, they wouldn't be so worried about the Fed's so-called independence. For background, contemplate a recent New York Times opinion piece by former Federal Reserve Chairs Ben Bernanke and Janet Yellen. While they're no longer at the central bank, their ideas about inflation remain. And what they imagine inflation to be speaks to the real problem at the Fed. In an attempt to make a case for central bank independence, Bernanke and Yellen looked back in time to 1972. They contend that 'President Richard Nixon pressured the Fed chair Arthur Burns to keep rates low ahead of the 1972 election to provide a short-term economic boost.' They assert that 'The result, however, was stagflation.' Bernanke and Yellen mistake causes. Inflation is a shrinkage of the monetary medium, in our case the dollar. The latter happened by design in August of 1971 when Nixon, despite passionate attempts by Burns to convince him not to, severed the dollar's link to gold. Nixon's act was itself inflation as any action meant to shrink the exchangeable value of the exchange medium is. Nixon got the dollar he wanted, which means he got inflation. As for Nixon's subsequent pressuring of Burns, it's plainly ignored by Yellen and Bernanke that individuals borrow money for what it can be exchanged for. It's a reminder that credit isn't decreed by central bankers, rather it's produced privately. Which is just a comment that no one just borrows to borrow, rather they borrow to get. In other words, Burns couldn't have decreed credit cheap and easy even if he had wanted to. Markets always speak. Bernanke and Yellen go on to promote the fiction that the end of the 1970s inflation was an effect of Paul Volcker's 'monetary tightening' that 'led to a painful recession.' In this case, the former Fed chairs unwittingly find themselves joining hands with supply-side happy talkers who to this day embrace the falsehood that the fix for inflation is putting people out of work. No, such a view isn't serious. There's no pain associated with ending inflation simply because there's no pain to be had in monetary media that are consistent as measures of value. When it's remembered that the sole purpose of money is to facilitate the exchange of goods, services and labor, it's easy to see that there's nothing economically harmful or difficult about arresting inflation. The latter is as simple as associating the currency in question with stability as a measure of value. Which is a reminder that inflation is a policy choice, not some long and painful hike back from the proverbial abyss. Just tie the dollar to something known to be stable, and markets will comply. Just as President Nixon was able to cruelly foist inflation on the U.S. and the world by severing the dollar's link to gold, any president today (including Donald Trump) could end inflation with a decree to resume dollar-price stability born of a gold peg, or whatever peg the president deems most associative with stability. All of which speaks to the real problem at the Federal Reserve right now. It's not about 'independence' or lack thereof. The Fed is a political creation so it's never been independent to begin with. What's needed is a trusted dollar, but for the problem that neither Bernanke or Yellen, nor for that matter officials at the U.S. Treasury, understand what inflation is. We have a problem of inflation mystification, nothing else.
Washington Post
24-07-2025
- Business
- Washington Post
Trump visits the Federal Reserve in escalation of pressure campaign
President Donald Trump will visit the Federal Reserve on Thursday afternoon, joining a previously scheduled tour for White House officials of an extensive construction site. The White House's attention to the $2.5 billion renovation of two historic buildings designated as the Federal Reserve's headquarters comes at a time when Trump has expressed broader frustration with interest rates and repeatedly excoriated Fed Chair Jerome H. Powell for not immediately slashing borrowing costs. Despite the pressure, the Fed is expected to hold interest rates steady at its scheduled policy meeting next week. Top Fed officials are already gravitating toward more rate cuts, possibly as soon as September, after pausing to assess how Trump's trade and other policies weigh on the economy. The Fed operates independently from the White House. Much like Supreme Court nominees, once confirmed the president doesn't have direct sway over Fed officials who independently decide whether to help stimulate the economy or tap the brakes if the economy is heating up too quickly. Trump's visit will mark the first time in nearly 20 years that a president will visit the central bank. The last time was when President George W. Bush attended the swearing in of Ben Bernanke, a former adviser, as the Fed chair. White House officials have signaled on a near daily basis their displeasure with Powell but have also suggested they have no plans to take the unprecedented step of seeking to fire Powell. Still, Fed watchers see the criticism over the extensive renovations as a move to lay the groundwork for a potential 'for cause' removal. Asked by a reporter earlier this month if the high price tag could be grounds for removal, Trump said: 'I think it sort of is.' The following day, Trump told reporters he wasn't planning to dismiss Powell 'unless he has to leave for fraud.' This week Trump has sharpened his criticism of Powell and the renovations to the Federal Reserve Building. 'And (Powell is) building a building — $2.7 billion, with over $900 million overrun,' Trump said on Tuesday. 'This guy is building this building that's severely overrun. And what does he need a building for? Why does he need space for more people.' The President has stressed that other major economies, particularly in Europe, have lowered interest rates several times while the United States had taken no such measures. At an event with President Ferdinand Marcos Jr. of the Philippines on Tuesday, Trump characterized the economy as strong and 'setting records.' But he lamented that mortgage costs were too high, which he blamed on Powell. 'Our economy is so strong now, we're blowing through everything, we're setting records. People aren't able to buy a house because this guy is a numbskull, he keeps the rates too high, and probably is doing it for political reasons.' He suggested that Powell had behaved politically, slicing interest rates before the election to bolster the prospects for Vice President Kamala Harris, Trump's opponent in the presidential race. 'He keeps the rates too high, and (he's) probably doing it for political reasons,' Trump said. 'The only time I remember him cutting rates, I mean, he cut the rates just before the election to try and help Kamala or whoever he was trying to help.' The Supreme Court recently signaled that a top Fed official could only be removed 'for cause,' meaning some type of malfeasance, rather than a policy dispute over interest rates. Though the Trump administration has generally sought to apply daily pressure on Powell, in television interviews or social media messages, some officials have been more measured. Treasury Secretary Scott Bessent said earlier this week that Trump isn't planning to oust Powell, whom he described as a dedicated public servant. 'There's nothing that tells me that he should step down right now,' Bessent said of the U.S. central bank chief, speaking Tuesday on Fox Business. 'His term ends in May. If he wants to see that through, I think he should. If he wants to leave early, I think he should.' Powell has given no indication he plans to leave early and is expected to fight any effort to oust him. Still, the options aren't great for the Powell and the Fed. If they cut rates now, they look like they're capitulating to pressure from Trump. And if they keep rates unchanged, the attacks could succeed in undermining Powell's public reputation. Indeed, a White House official said last week that their goal in highlighting the costly renovations was, in part, 'to damage this guy's image,' according to Politico. The political environment is now more hostile to him and the central bank, with at least a handful of Senate Republicans calling for the longtime Fed leader to resign. While congressional Republicans generally defended Powell against Trump's attacks during the president's first term in office, many of Powell's top defenders have retired. The Fed's building project isn't new and the cost overruns have been a problem for years, in part the result of expansive work underground in an area along the National Mall that used to be a swamp. Other factors inflated the costs, the Fed said, such as pandemic-era inflation for building materials and more mundane aspects of the project, such as asbestos removal. In a three-page letter to White House Office of Management and Budget Director Russell Vought, Powell said last week that the project was large in scope because it involves the renovation of two historic buildings that were first constructed in the 1930s but hadn't seen a comprehensive renovation since they were first constructed. Vought is expected to join Thursday's tour of the Fed buildings along with James Blair, a White House deputy chief of staff, and Bill Pulte, a housing-finance regulator who has been an outspoken critic of Powell.
Bloomberg
23-07-2025
- Business
- Bloomberg
How a Central Bank Fumbled Its Communication
Communication has been a basic tool of central banking for decades, but it can be a tricky thing to get right. Merely fronting the microphones doesn't deliver superior results. The message sent has to be clear — and received. The Reserve Bank of Australia needs to do much better. The authority's decision to forgo a widely anticipated interest-rate cut this month left much to be desired, and the RBA's explanations for why it wrong-footed investors have been subpar. Press conferences and the signaling of intent through speeches aren't sidelines. No lesser person than Ben Bernanke, a Nobel laureate and former Federal Reserve chair, observed that successful policy was 98% talk and 2% action.
New York Times
16-07-2025
- Business
- New York Times
Public Views of the Fed Chair Are Polarized as Trump Mulls His Firing
Public confidence in the chairman of the Federal Reserve, Jerome H. Powell, is low. As President Trump muses anew that he might fire Mr. Powell, only 37 percent of Americans say they have confidence in the Fed chief to recommend the right policy for the economy, according to a recent Gallup survey. Mr. Trump's attacks on Mr. Powell are not new. But even though the Fed, like many institutions in America, has made a concerted effort to stay above politics, it is not immune to the country's growing polarization. In the early 2000s, both Republicans and Democrats had broadly positive attitudes about Alan Greenspan, the Fed chair at the time. As Americans grew increasingly politicized across nearly every issue, their attitudes toward the Fed chair tended to closely match their views of the incumbent president. Democrats were particularly positive toward Ben Bernanke in the Obama years, for example, while Republicans had high confidence in Mr. Powell shortly after Mr. Trump appointed him during his first term. But while people are aware of the position of Fed chair, and how their decisions have broad consequences for Americans at every income level, many people don't know who Mr. Powell is. When Americans were asked in 2024 if they approved of Mr. Powell's job performance, more than 40 percent of respondents did not offer an opinion, according to a survey from Ipsos, a public affairs firm. Republicans turned deeply negative toward Mr. Powell during former President Joseph R. Biden's time in office, when Democratic confidence in the Fed chair soared. But Mr. Powell has been experiencing a rebound in support among Republicans as Mr. Trump weighs firing him before his term ends next year. Mr. Trump seemed to back off his threat to remove Mr. Powell in comments at the White House on Wednesday, a backtracking that may reassure business leaders and administration insiders who have warned against such a move. 'Playing around with the Fed can often have adverse consequences — the absolute opposite of what you might be hoping for,' Jamie Dimon, the chief executive of JPMorgan Chase, told reporters after his bank's quarterly earnings release on Tuesday. And while trust in Mr. Powell hovers below 40 percent, the same Gallup survey that produced that figure put confidence in Mr. Trump's ability to handle the economy only slightly higher: Only about 44 percent of Americans have confidence in the president to do the right thing for the economy.
