Dear Valued Clients and Friends,
President Trump’s selection to serve as the chair of the Federal Reserve, Kevin Warsh, has been confirmed in that role and now serves as the world’s premier central banker. The appointment came with some controversy, not because Kevin Warsh was deemed by one party or another to be “unqualified,” but because a lingering suspicion exists that whoever was going to get this job would have to promise to be a puppet for the President. This suspicion may be sincerely held by some, and it may be embellished by others to drive a narrative they are after, but regardless of the motive, we have watched a steady drumbeat for months now about threats to Fed independence. And while I believe that many saying this are cosplaying for the cameras, I think there are a couple of things that need to be said about the subject if we are ever to make any inroads towards optimal monetary policy.
In fact, I am determined that some people who value freer markets with less distortions take this subject on for years to come. I deeply care about the topic of monetary policy because I have spent my adult life watching people err from two opposite and extreme directions. Many of the subjects that I believe require nuance and understanding, I give up on because, well, it is exhausting to be alive in 2026 and have to argue for nuance all the time in a day and age that cares for little more than half of a headline. But I cannot give up on the subject of monetary policy because I believe it is too important, the stakes are too high, and the gravity of what has transpired with the tool of interventionist monetary policy will not allow me to.
Was President Trump within bounds to go after Jerome Powell as he did? Was it legal? Was it right? Was Jerome Powell within bounds to effect monetary policy as he did? Is there a big concern that the new Fed chair (Kevin Warsh) will take his P’s and Q’s from the White House? Is Fed independence in the Constitution? Is it in Congressional legislation? What is the legal view here, what is the prudential view, and is there a tension between the two? What have we experienced in central banking about “independence” in the last ten, twenty, and thirty years? What should we expect from Kevin Warsh – monetary policy that reflects his beliefs about economic duty and responsibility, or monetary policy that satisfies the political ruling class?
If I can cogently answer all of the above questions for you today, and I think I can, then promise this is going to be a Dividend Cafe worth the read. And when this Dividend Cafe is said and done, it is not a topic I will be letting go of. As I said, the stakes are high.
Let’s jump into the Dividend Cafe …
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Depoliticizing This
I think long-time readers/listeners of Dividend Cafe know that I am immune to criticism around the posture I take towards President Trump. I criticize his policies or behavior when I believe it is wrong and yet generally avoid a deranged manner of doing so. I compliment his policies when I believe they are right and yet generally avoid a sycophantic manner of doing so. I do not believe I deserve any kudos or commendation for this posture towards the President, because I think it is the basic, vanilla, low-bar, table-stakes posture every self-respectable human being should take. I don’t think people should be commended for breathing, and I view the “balls and strikes” approach I take to the President to be akin to breathing – it ought to be instinctive.
So let’s get this out of the way now. I am going to say two things in this Dividend Cafe about President Trump and central banking, and one of them will upset some people, while the other will upset others. But I am right about both things I am going to say, so it is what it is. Sneak preview:
- Much of President Trump’s behavior towards Jerome Powell was reprehensible and unbecoming of the office he holds. And attempts to bully a central banker into one policy decision or another towards political aims are prudentially wrong.
- Jerome Powell was wrong in a lot of his central banking decisions, and the President has every right to believe that and even say so. And the notion that the Fed is totally “independent” of the executive branch is laughable – and certainly not codified in the Constitution, statute, or historical precedent.
And yes, both things can be true at once, because they are.
That’s all I have to say about that. Now let’s talk monetary policy.
Is Kevin Warsh Going to be Independent?
I watched the new Fed chair’s confirmation last Friday and enjoyed his speech a great deal. I also heard President Trump say this, verbatim, in his introduction of Kevin:
“I want Kevin to be totally independent. I want him to be independent and just do a great job. Don’t look at me – don’t look at anybody. Just do your own thing – and do a great job.”
I was on a financial media TV show shortly after the confirmation proceedings, and the buzz in the air was, well, lame. “Is it a bad look that the President was at his confirmation?” “Should we be nervous that [so and so] was there, or that [so and so] was not there?” I suppose some of this hand-wringing and pearl-clutching may have been sincere (I doubt it), but it is all a by-product of a newly created narrative that the independence of Fed policy-making is suddenly and, out of nowhere, under attack. This, of course, presupposes that Fed independence has (a) been defined, (b) been established as a historical precedent, and (c) been legitimately threatened.
When I ask the question, “Will Warsh be independent?” I am asking if he will advocate for monetary policy that he believes serves the mandates he has committed to. I am asking whether his decisions will be authentic and legitimate. I am asking whether the objectives will be to drive the Fed’s mandate(s), not an alternative political mandate. I happen not to have an iota of fear about this, but that is the context of the consideration.
What I do not mean is whether the process is political (it is), whether there will be coordination with the Treasury Department (there will be), and whether the President will have a dog in the hunt (he will).
But the new media obsession over “Fed independence” is problematic because it is not rooted to anything legal, Constitutional, clear, specific, cogent, or historical. In some ways, you could argue that those now worried about the politics of undermining Fed independence are, themselves, quite politically motivated (“you think?”).
I do not believe the DOJ should have used the tactics they did around a criminal investigation into a building project. I do not believe any honest person thinks they did that out of genuine concern about a construction budget. And I do not believe attempts to embarrass or intimidate a Fed chair are acceptable. I also do not believe that saying, “we have the greatest economy we have ever had,” and then also saying “we should have 0% or 1% rates right now” are, shall we say, intellectually compatible. I am not defending the President or other Powell critics in much of what has transpired.
But.
I am going to suggest that maybe, just maybe, we can resolve a lot of the concerns people say they have about this by actually getting it right legislatively.
The Power over Money
The Constitution does not establish the Federal Reserve as the overseer of money, its cost (interest), or its value – and you may be shocked to hear that it does not delegate that power to the executive branch, either. The regulation of the value of money and the power to create it is given to Congress (Article 1, Section 8). Congress, with the power granted by the Constitution, passed the Federal Reserve Act in 1913. This gives the Fed exactly the authority Congress has delegated to it – no more, and no less. And Congress can modify or even repeal this authority at any time.
The challenge here, and why there is a legitimate gray area legally, is that the Fed is not set up as a Congressional agency. The Fed’s Board of Governors requires Senate confirmation, but they serve 14-year terms and cannot be fired at will. They are therefore not under direct Presidential control. However, when an entity has been set up that is not an executive branch, is not a private institution, and is not a Congressional agency, it essentially sits in a zone that actually doesn’t exist in our form of government.
We have legally created an entity under the Federal Reserve Act that, by design, is “sort of” under Congress (but not really) and “sort of” under the executive branch (but not really). And I freely admit that many people seem to care only about this legal ambiguity when there is a political catalyst for their angst, but some form of legislative tightening would go a long way towards alleviating that temptation and selectivity. The Humphrey-Hawkins Act of 1978 formalized the Fed’s mandate (price stability and maximum employment) and strengthened Congressional oversight of the Fed. The Fed chair is responsible for reporting to Congress twice a year on monetary policy and reiterates that the Fed is a creation of Congress. But structurally, we still have an entity that exists in a sort of nebulous box that no other branch, department, or agency exists in, with ill-defined or undefined checks and balances.
No one on any side of this issue, legally or economically, believes that Fed decisions are apolitical. Monetary policy impacts employment and prices (as the Humphrey-Hawkins Act explicitly states – if it didn’t, why would the mandate be to impact those things?). But since we are a debtor nation that runs deficits every single year and maintains a balance on our national credit card of over $30 trillion, decisions that affect the cost of money (interest rates) obviously affect the cost of government borrowing, too. And since we are not the only nation on earth, these decisions obviously impact exchange rates with other countries, too. In what world are these things not political?
Can you imagine if there were an outside “quasi-agency” not exactly under Congress and not exactly under the executive branch that had full authority over tax policy? Would anyone like that to be “independent”? The sheer nature of our republic demands representation in these vital economic categories (where did that idea come from, I wonder?), and we are kidding ourselves to act as if monetary policy is not, to some degree, political.
Everyone Agrees with Me – Once it Starts Raining
If it sounds like what I am saying is controversial – that the Constitutional spirit, reality, and tradition – do not allow for a Fed that exists with pure and complete independence – don’t worry. There is absolutely no precedent for a purely independent Fed in the real world. When the tough times come, everyone screaming “Fed independence” runs to the front of the line to say, “We need strong alignment between the Fed and the Treasury Department to get through this.” Re-phrased: “We need the Fed to accommodate the political needs of the moment.” Now, that may not be a bad thing – it may not be bad policy – what they do in these constant moments of Fed-Treasury coordination may be good steps that create good outcomes – but they are in no sense “independent.”
I am not referring to how Richard Nixon berated Arthur Burns to cut interest rates in 1972 (check the tapes!). I am not referring to Al Gore being privately furious with Alan Greenspan in 1994 for raising rates (and that really was private – Clinton administration officials refused to publicly criticize the Fed). I am talking about public, explicit, and historically on-the-record coordination between the executive branch and the Federal Reserve, whenever things get a little wet.
Secretary Robert Rubin and Alan Greenspan made this accord famous in the 1990s. Time Magazine helped codify one of the most famous expressions and images of the era:
(Note – the answer to the top right question is Shakespeare).
From the Mexican peso crisis to the Asian financial crisis to the Long-Term Capital Management implosion, the 1990’s were a series of events that catalyzed high coordination between the Fed and the executive branch of government, and that created media stardom for all of them in so doing (meaning, it wasn’t exactly a secret).
What could be more famous in the folklore of Fed history than the coordination of Treasury Secretary Hank Paulson and Fed chair Ben Bernanke in the depths of the Global Financial Crisis of 2008? TARP was designed by Bernanke and Paulson together and, while passed by Congress, was a child of this coordinated braintrust. Outside of Congress, the Bear Stearns process, the AIG bailout, many activities with Citi, and a host of alphabet-soup liquidity facilities to backstop commercial paper, asset-backed securities, and mortgage bonds were all jointly designed and implemented by the Fed and Treasury.
Most recently, the COVID moment of 2020 had Treasury Secretary Steve Mnuchin and Fed chair Jay Powell on speed dial. Here, the alphabet soup lending facilities were literally joint Treasury-Fed operations, branded and funded as such, and the two did press conferences together.
These were substantial moments of political and economic coordination. I will tell you in full transparency that there are things done in these aforementioned historical periods I agree with and things done I fervently disagree with, but that is not really my point here. My point is that no one has ever, ever, ever actually believed these organizations function independently.
Is crisis coordination prudentially wise? I reckon it is. Is that different from routine monetary policy? If so, how is it different, and where do you draw the line? Can one argue that some decisions in routine monetary policy play a role in what becomes a crisis? I reckon so. What I am getting at here is that we are using language now to describe one thing (we don’t want the executive branch to out their thumb on the scale for interest rates just to score short term political wins), but not really addressing the far bigger thing (the legal ambiguity that exists structurally, and the broader accord we have set up where the Fed is a facilitator – at some level – of runaway Congressional spending and Treasury dept preferences).
Walking and Chewing Gum
As a matter of what is good, prudential, wise, and credible, we should not have an executive branch using monetary policy for short-term sugar highs. As much as I can be critical of President Trump I actually do not think that was ever his goal with Powell … I think he believes Powell was too tight in 2018 and that President Trump got vindicated on that (I happen to agree) and that the President’s love of low interest rates is no more complicated than – wait for it – he is an over-levered real estate developer to the core of his being (see: 1976-2016). You can argue that if unnaturally low interest rates drive inflation (that can be true, but is not always true), then any politician advocating for such when affordability and prices are the most pressing issues on voters’ minds, is not being politically astute at all!
But regardless of the motivation, the wisdom, or the politics of it all, I am perfectly comfortable saying that there are prudential reasons for the President to be moderate and prudent in exerting influence on monetary policy. There are preferential reasons to favor restraint.
But at the same time, we can and should recognize that:
- Congress created the Fed
- Congress sets its mandate
- The governors in the Fed are appointed by the President and confirmed by the Senate
- Policy administration always has and always will require coordination with the Treasury Department, which reports to the President
In other words, we shouldn’t let some of the ways politicians may have handled their interventions obfuscate the fact that the Fed does not exist as a purely independent entity.
Some Crazy Solutions
If I were king for a day, I would wave my magic wand and ask Congress to do its damn job. Now, that is true of about a thousand things with Congress, but what we have now is a whole discussion about “Fed independence” that is really about “Congressional dereliction of duty.”
Public policy should be set by those who answer to the public. The Ph.Ds in their conference rooms who have such an enormous footprint in the U.S. economy did not take it by force (or charm – I assure you) – they were given it by the Congress that was delegated these responsibilities in the United States Constitution. The Federal Reserve Act was within Congress’s jurisdiction to pass, but they must simply amend the statute to button up the structure and accountability. Economic stability may very well benefit from non-elected officials making economic decisions, but Congress must do its job to oversee, constrain, and define the scope of the work. We have created an amoeba with no limiting principles in its jurisdiction, and Congress let this happen.
My crazy solution in the Fed independence debate: a Congress that defines the rules, and that does its job in oversight.
Back to Kevin Warsh
The issue is not whether President Trump will have opinions about monetary policy, or even whether he will share those with Kevin Warsh. The fact of the matter is that as of seven days ago, Kevin Warsh cannot be fired without cause. My hope and prayer is that Warsh represents the first step in some incremental movement towards market forces setting the price of money. Interest rates may go lower or may go higher apart from intervening forces, but they would do so without the discretion of outside forces (political, or messianic, or whatever you want to consider them to be).
Lowering rates to help a politician win an election is wrong, but it is also stupid.
But you know what else is wrong and stupid? Increasing rates because you believe that growth is inherently inflationary.
It isn’t.
So by all means, talk about Kevin Warsh being independent of Donald Trump if you want. But you know what I want more than anything else?
A Federal Reserve independent of the Phillips Curve.
Growth is not for the Fed to accelerate or decelerate. And the sooner we understand this natural principle of economics, the sooner we can stop talking about Presidential behavior on one hand the myth of Fed independence on the other.
A guy can dream. In fact, any of us who want this should dream. We can call ourselves “the committee to save the world.”
Quote of the Week
“I respect his independence; however, I hope that independently he will conclude that my views are the ones that should be followed.”
~ President Richard Nixon
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I am hitting send on today’s Dividend Cafe and running from my hotel room back to the Reagan Museum and Library, where I give the plenary economic session in a few hours. It was an honor to be a part of this event, and I have thoroughly enjoyed my discussions with other speakers and luminaries today. I am finishing my fifth speech in five days in four cities and am ready for a weekend.
Enjoy yours, and reach out with any thoughts or questions, any time.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
