Why the U.S. Federal Reserve Must Remain Independent
Picture the Fed drama as a carnival sideshow: Trump as the ringmaster, loudly promising to fire Jerome Powell as if he’s announcing the bearded lady, while Scott Bessent clangs cymbals behind him to keep the crowd riled up. The MAGA chorus chimes in like a troupe of enthusiastic jugglers, tossing insults instead of bowling pins. And then—voilà!—out of the magician’s hat comes Stephen Miran, presented as a “temporary Fed chair,” a kind of policy placeholder no one ordered, like the substitute clown filling in when the real act calls in sick. The whole thing feels less like monetary governance and more like a traveling circus where the only certainty is that someone’s going to trip over the elephant.
Wisdom Gained from Past Experience
• The Nixon–Burns episode (1969–1974) demonstrates how short‑term political pressure on the Federal Reserve can deliver election‑cycle gains but sow long‑term macroeconomic damage—most notably the Great Inflation and the collapse of the Bretton Woods system. [1][2][3] – Please reference Research Sources below
• Contemporary calls to “rein in” the Fed—such as proposals to strip it of bank‑supervision authority or to cajole easier policy—risk repeating the same credibility mistakes. [4][5][6]
• For investors, the Fed’s credibility is the anchor for inflation expectations, term premia, and dollar stability. Compromising independence raises risk premia, depresses equity multiples, and invites exchange‑rate volatility.
• Policy design should safeguard independence while ensuring accountability: transparent rules, broad‑based committees, robust communication, and a supervisory framework tightly linked to lender‑of‑last‑resort functions.
I. The Nixon–Burns Playbook: What Really Happened
When Richard Nixon named Arthur F. Burns as Fed Chair in 1970, he brought into the Eccles Building a trusted ally and former adviser. The political objective was clear: avoid a recession and keep credit conditions easy heading into the 1972 election. Declassified Oval Office recordings now make the pressure explicit. The Nixon tapes capture the President prodding Burns to accommodate—seeking lower rates and faster money growth despite already‑rising inflation. [1]
Burns’ own contemporaneous journals echo the intensity of the White House’s involvement. They chronicle repeated contact, including Nixon’s private appeals and political calculations around unemployment, prices, and the campaign calendar. [2]
Policy actions matched the politics. In August 1971, Nixon unveiled the so‑called “Nixon Shock”: he closed the gold window, ended dollar convertibility, imposed a 90‑day wage‑price freeze, and announced a temporary import surcharge. [3] The move effectively dismantled the Bretton Woods system and—coupled with an expansionary policy stance—untethered inflation expectations. Monetary accommodation continued into 1972, helping growth and Nixon’s landslide victory. But the bill arrived quickly: inflation surged in the mid‑1970s and then re‑accelerated by 1979–1980, ultimately forcing the Volcker disinflation. [2][3]
Three lessons stand out:
1) Elections and money don’t mix. Political time horizons are short; price stability requires long horizons. The temptation to "buy" activity before a vote is powerful, and history shows the costs arrive later.
2) Expectations dominate. Once households and firms believe leaders will tolerate higher inflation, they demand compensation, embedding inflation into wage and price setting. Re‑anchoring expectations is painful and requires credibility that is hard to rebuild.
3) Institutional memory matters. The Great Inflation scarred the Fed and informed later frameworks (e.g., explicit inflation goals), all designed to insulate decisions from partisan pressure.
II. Why Political Pressure Backfires: The Mechanics
Political pressure tends to produce pro‑cyclical policy errors. If a White House leans on the Fed to ease into a late‑cycle economy, near‑term growth can pick up, but inflation risk premia and term premia rise as investors price future instability. That repricing lifts long‑bond yields even as policy rates fall, steepens curves for the wrong reasons, and undermines equities’ valuation support. Meanwhile, the currency weakens as foreign investors question the policy anchor, increasing imported inflation and feeding a self‑reinforcing loop. This is the classic political business‑cycle mistake: short‑run gains, long‑run costs in the form of higher and more volatile inflation and lower trend growth.
The Volcker era is the mirror image. Once independence was reasserted and policy credibility restored, inflation expectations fell, risk premia compressed, and the stage was set for a multi‑decade decline in yields and a secular bull market in risk assets.
III. Today’s Echoes: Pressuring Powell and Debating “Mission Creep”
Recent commentary from senior officials revives the risks of politicizing the central bank. Treasury Secretary Scott Bessent has argued that the Fed’s remit has drifted—calling for an independent, nonpartisan review and questioning whether the central bank should continue to regulate the banking system. [4] Kevin Hassett, a finalist in discussions about Fed leadership, has endorsed concerns about institutional “mission creep,” while simultaneously stressing that the Fed must be fully independent—even from presidents who appointed its leaders. [5]
Fed Chair Jerome Powell has pushed back on the premise that supervision is extraneous, emphasizing that an efficient, well‑capitalized banking system is integral to public welfare and financial stability. [6] The institutional reality is that monetary policy, supervision, and lender‑of‑last‑resort functions are intertwined. Effective crisis response depends on timely supervisory information and operational authority. Severing these connective tissues could slow decision‑making in stress, raise systemic risk, and ultimately undermine price stability—the very mandate critics say they want to protect.
IV. The Investor’s Angle: What Markets Price
For investors, Fed independence is not an abstract constitutional virtue; it is a cash‑flow and discount‑rate issue.
• Rates: Independence anchors the expected path of inflation and the term premium. Politicization raises uncertainty, pushing long yields higher.
• Equities: Higher real yields and fatter risk premia compress multiples, especially for long‑duration growth assets.
• Credit: Wider spreads reflect policy uncertainty and the increased risk of pro‑cyclical mistakes.
• Dollar: Confidence in the policy framework supports reserve‑currency status; politicization invites persistent depreciation pressure.
History’s verdict is blunt: the Nixon‑era playbook of pressuring the Fed produced short‑term political gains and long‑run macroeconomic costs. Markets will not give policymakers the benefit of the doubt a second time.
V. Safeguards that Protect Independence (and Accountability)
1) Reinforce the dual mandate through transparent strategy: publish systematic reaction‑function ranges and regular, retrospective audits of forecast errors and policy choices.
2) Keep supervision linked to monetary stability: maintain a robust Vice Chair for Supervision, but ensure policy is decided by broad committees, not single appointees. Preserve data and authority channels that speed crisis response.
3) Appointment insulation: staggered terms and appointment processes that reduce the odds of wholesale leadership turnover aligned with election cycles.
4) Communications discipline: codify norms against public political interference and strengthen Congress’s oversight around goals, not day‑to‑day decisions.
Conclusion
The record from the early 1970s is unambiguous. Political pressure on the Federal Reserve compromised policy, eroded credibility, and left the United States with the bill for a generation—first via the Great Inflation, then via the painful disinflation needed to repair it. Today’s efforts to lean on the central bank or to dismember core supervisory capabilities risk repeating that cycle in modern dress. An independent Fed is not a luxury; it is a national competitive advantage. The right lesson from Nixon to now is simple: keep politics out of monetary policy.
Research Sources (linked)
[1] B. A. Abrams, “How Richard Nixon Pressured Arthur Burns: Evidence From the Nixon Tapes,” Journal of Economic Perspectives 20(4), 2006. Open version via FRASER: https://fraser.stlouisfed.org/files/docs/meltzer/jep_2006_abrams_how_richard_nixon.pdf
[2] Arthur F. Burns, Handwritten Journals (transcript), Gerald R. Ford Presidential Library, esp. entries 1970–1974. PDF: https://www.fordlibrarymuseum.gov/library/document/0428/burnstranscript2.pdf
[3] Sandra Kollen Ghizoni, “Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls,” Federal Reserve History, Board of Governors. https://www.federalreservehistory.org/essays/gold-convertibility-ends
[4] Scott Bessent, “The Fed’s Gain of Function Monetary Policy” (op‑ed), Wall Street Journal, Sept. 2025. https://www.wsj.com/opinion/the-feds-gain-of-function-monetary-policy-ac0dc38a
[5] Bloomberg, “Fed Chair Finalist Hassett Backs ‘Mission Creep’ Criticism,” Sept. 7, 2025. https://www.bloomberg.com/news/articles/2025-09-07/fed-chair-finalist-hassett-backs-mission-creep-criticism
[6] Jerome H. Powell, “Opening Remarks at the Integrated Review of the U.S. Bank Capital Framework,” July 22, 2025. Text: https://www.federalreserve.gov/newsevents/speech/powell20250722a.htm