Over the course of the last 12 months, the current President of the United States and his administration have made it clear that they would like Federal Reserve Chairman Jerome Powell to step down from his role, a role this same President appointed him to during his first term in office. The chief complaint is that Chairman Powell has been too hesitant to lower interest rates at the behest of the administration.
The Federal Reserve Bank was designed at its founding in 1913 to be an independent institution, one that should not be subjected to the whims of political pressure from the executive or legislative branches of government. This independence has been questioned and is currently being tested by this administration.
As fiduciaries, here are three primary reasons why we believe this independence is important:
Credibility and Inflation Control
An independent Fed can make unpopular but necessary decisions, such as raising interest rates, as it did in 2022, to help control inflation. When financial markets and households believe monetary policy is driven by long-term price stability rather than short-term political pressure, confidence in the economy is higher. History has shown, especially during the 1970s, that when central banks appear politically influenced, inflation tends to be higher and more volatile.
Long-Term Economic Stability Over Short-Term Politics
Economic policy that can endure across multiple election cycles promotes stability. Independence allows the Fed Chair and the FOMC (Federal Open Market Committee) to focus on sustainable growth and financial stability rather than stimulus timed to elections. This separation helps avoid boom-to-bust cycles fueled by the allure of easy money, which ultimately harm workers, savers, and businesses as prices become less reliable and wages lose purchasing power.
Market Confidence and Lower Borrowing Costs
For the latter half of the 20th century, global investors have trusted U.S. financial markets in part because monetary policy has generally been insulated from political interference. That trust supports the dollar’s reserve currency status and helps keep Treasury yields, and therefore mortgage, business, and consumer borrowing costs, lower than they otherwise would be. Undermining Fed independence risks higher risk premiums across the financial system, leading to higher interest rates and borrowing costs for all.
In summary, Bear Mountain Capital financial advisors believes Federal Reserve independence is essential to our democracy, long-term economic stability, and America’s ability to project strength globally. By insulating monetary policy from short-term political pressures, the Federal Reserve and its FOMC help preserve confidence in the U.S. dollar, the broader economy, and our nation’s long-term prosperity.