Monday, August 18, 2025
The Federal Reserve was established to serve as an independent guardian of the U.S. financial system, free from political pressures and short-term decisions. But President Trump is blurring the lines.
It’s President Trump versus the Federal Reserve.
This could have serious implications in the long term. You also can make a lot of money in the short term.
On June 30, President Trump wrote a note on top of a table of global central bank interest rates and sent it to Fed Chair Jerome Powell. He wrote, “Jerome, you are, as usual, too late,” and complained that hundreds of billions of dollars are being lost due to Fed policy.
The Fed controls the benchmark interest rate, the federal funds rate, and bank regulations. In a broader sense, that gives the Fed power over credit creation, the money supply, and the value of our country.
Every politician, if left to their own impulses, would want lower interest rates, especially around election time. Lower rates boost the economy, making it easier to borrow and spend.
However, the cost of low rates today is inflation and a weakening currency tomorrow. While inflation eats at savings, it also eases government debt payments, something every president wants to tackle.
In the 1970s when inflation topped 8%, Fed Chair Paul Volcker set interest rates at 19%. Of course, that plunged the economy into a deep recession, but it solved the inflation problem.
Still, it wasn’t popular, ultimately costing President Jimmy Carter reelection in 1980 (after he nominated Volcker). The Fed Chair didn’t care because he was insulated from political pressure and public opinion.
Today’s elected officials aren’t willing to do anything painful in the short term to protect our economy in the long term. That’s why fiscal and monetary decisions must be kept separate. We need an independent central bank.
You don’t let a child with a sweet tooth set the family’s candy budget.
Powell seems to realize history will remember him better for his backbone than his subservience to the president. So, while a politicized Fed is a threat in the long term, it’s great for stocks in the short term.