Is the Fed Celebrating Independence Day?

The Impact of Warsh And the Choices by Other Central Bankers

Is the Fed celebrating Independence Day?

There’s no telling what the Fed celebrates or why. Under Jerome Powell a certain antipathy developed between him and Donald Trump, and because of that, it was perceived that Fed independence was under attack. To some extent it was, as the president, seeking to find the limits of his power, he did try to assert his right to fire Powell; he did try to fire Governor Lisa Cook. Another governor did decide to resign before the end of her term, but only a few months early, and any link to Trump pressure has not been established there. Powell and the Fed pushed back against this pressure, including allegations that Powell gave misleading testimony about the Fed building project that had down to $3.6 billion. That was a nonmonetary policy decision that jumpstarted the president’s most aggressive action against the Fed Chair. Powell ultimately has received protection from the Supreme Court, particularly for the Fed chairman role and also securing at least the right to due process for governors and an inability of the president to fire Fed governors except for cause and only after due process. It seems to me that the upshot of the Trump ‘attack on the Fed’ has been to make the Fed stronger and to ring-fence the Fed further from presidential interference. Supreme court decisions have made it clear that the Fed has certain constitutional protections and rights. This should make the Fed feel that it has enhanced independence.

The President is not the Fed’s main overseer

However, the Fed was created by an act of Congress, and Congress is its proper overseer. The Fed chair testifies twice a year before each of the House’s and Senate’s appropriate financial committees. One of the things that Donald Trump clashed with Jerome Powell on was not just his reluctance to guide interest rates as deeply low as he would like, but also, eventually, because Powell came under the influence of Democrats and did several things that the Democrats were pressing him to do. Among them was to include climate change as a condition for bank lending by including it as a factor in stress tests; another was his agreement to run the economy ‘hot’ and also his endorsement of DEI policies. Some of these did benefit Trump while he was president, and then others benefited Joe Biden. Then there was a strange and unwarranted rate reduction that occurred just before the elections when Kamala Harris was running against Trump for president.

Powell’s chairmanship was self-focused

In addition to all that is evidence that Jerome Powell, while chair at the Fed, tried to consolidate his power and to centralize more of the power in Washington rather than to allow some of it to be diffused through the regional banks (this shift had been in motion; it accelerated in Oct 2025). Bank examiners, for example, may have been housed in district banks, but they had a direct reporting line to the Board of Governors and to Washington. When I asked Perplexity-AI if the San Franciso Fed district bank had oversight responsibilities over SVB when it failed, I got this response:

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…the responsibility was part of the Federal Reserve’s bank supervision role, not a standalone “District Bank” authority separate from the Fed.

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And back when Powell was running for reappointment and there was a challenge to investments made by District Bank presidents Eric Rosengren and Rob Kaplan (both sets of transactions already approved by the Fed) at a time that the board was providing oversight for these securities purchase transactions that were approved, Powell disavowed any involvement in it and threw the challenge by Elizabeth Warren back to the local district banks, refusing to support them, even though their transactions had been approved by the Fed head of time as regulations required.

In addition, at that time Powell bent the knee to the demand by Democrats led by Elizabeth Warren, who wanted the Fed to be less preemptive in its policy. Powell thereafter refused to raise interest rates even as inflation grew stronger in later 2021. The Fed argued that the inflation was transitory and then declared that unemployment that was low was not quite back to full employment. Powell allowed inflation to get quite a bit over the top of the target before it reacted at all, waiting until Powell had been renominated and reappointed to a new term. All this makes the Powell video in which he claims never to have done anything other than to pursue policies that were in support of the dual mandate substantially suspect.

The Fed’s long-held insecurity about its independence

And long before Powell took office, the Fed has been jealously guarding its independence and aggressively opposed to admitting it has ever made any policy mistake at all. The Fed has long been concerned that any admission that it made a mistake to be something that could threaten its independence. All of this is quite apart from Powell and quite apart from Trump. And rather than viewing Trump as having had some kind of special attack on the Fed, we can look back at history and recall that Ronald Reagan, Richard Nixon, and Lyndon Baines Johnson each exerted special strong-arm pressure on the Fed to get it engage in policies that they desired (reference). Trump is hardly new to the idea of trying to strong-arm the Fed to get the policy that he wants, although the tactics pursued by Trump have been much more public and therefore are far more widely known. However, William McChesney Martin, a former Fed chair, reports that Lyndon Baines Johnson engaged in some unpleasant physical contact with him in the process of trying to bully him to execute the policies that Johnson wanted. As far as I know Trump never touched any Fed chairman.

To answer my own headline question about the Fed, the question is whether the Fed is able to live in the current sophisticated environment that has been created that actually has provided a new cocoon of protectionism for it. As far as I know, the Fed has not really changed its position on not liking to be criticized. Although that may change. Under the new Fed chair, Kevin Warsh, there is an attempt to alter control and to change Fed communication strategy and more.

Warsh has plans

Warsh would like to have more open dialogue and argumentation at FOMC meetings, but, in return for that, he would like to see district bank presidents speaking in public and disagreeing with Fed policy a lot less. In his view this will help the Fed to create clearer communication with the public rather than for the public to have to deal with the cacophony of different voices with different takes on policy. This is not an attempt to muzzle district bank presidents but rather to give them a more viable forum within FOMC meetings and, in return for that, to get on board with the policy decided at the meeting rather than to express in public a disagreement from what was agreed to and voted on and became Fed policy.

Globally central banking is changing—back to basics

At the meetings this past week at Sintra in Portugal, Kevin Warsh found kindred spirits, especially Andrew Bailey from the United Kingdom and Christine Lagarde of the European Central Bank. Bailey reported that the Bank of England had killed its forward guidance several years ago finding it to have been unproductive. Lagarde, in her opening statement, said how in the future the ECB is going to rely on traditional interest rate policy and pay much less attention to other tools that have been developed in the wake of the great financial crisis and in reaction to COVID. Both the Bank of England and the ECB are channeling moves for policy change that are very much in sync with the sorts of things that Kevin Warsh had said he wants to do at the Federal Reserve—things for which Warsh has been criticized.

Losing forward guidance is like losing a bad tooth

There’s a very good reason to think that the removal of forward guidance does not create the kind of loss that people are arguing that it will create. Forward guidance by a central bank that can’t forecast the future is not really very useful. In February research had already established that when the Fed provides some forward guidance, market forecasts tend to be much stickier to the forecast that the Fed provides rather than reactive to economic data. There’s no reason for the private sector to simply emulate Fed forecasts, and especially since the Fed provides policy guidance with dots only four times a year, a great reason for the market to be changing its positions and forecasts based upon incoming data, which it gets to see far more frequently than it gets guidance from the Fed. That, of course, sits on top of the point that the Fed guidance hasn’t been particularly good and sometimes has guided the market in the wrong direction. For these reasons and more, I regard The Fed distancing itself from forward guidance is a very positive development.

Task forces

Fed chair Warsh has put 5 task forces in place to look at policy and to provide suggestions for making better policy in the future. After the twists and turns the policy has been through in the wake of the great financial crisis and COVID, I think that a reappraisal of some of these techniques that were being used is a very good idea. Certainly, the explosion of the balance sheet is something that evolved for a variety of reasons that may not turn out to be optimal. Balance sheet size has become a hot potato of dissent; one of the main factors that ramped up the size of the balance sheet was the regulation that banks develop living wills, which has given them a more or less insatiable appetite for interest-bearing, highly liquid reserves. And this is why you hear people say that the move to address the size of the beds’s balance sheet is also going to be an attack on regulation. You can view it as an attack, or you can view it as a reappraisal.

Balance sheet denialists

People who say that the balance sheet can’t be made any smaller are largely people who are responsible for setting up the previous system of regulation that required banks to have these living wills and who support that program and don’t want that regulation changed. However, once you change that regulation, the size of the balance sheet can be reduced substantially, and, in fact, other steps could be taken to reduce the size of the balance sheet as well. The balance sheet cannot be reduced from the supply side by just reducing it unilaterally; it has to be reduced by trimming the factors that have created this inordinate demand for reserves by banks, and a good slug of this has come from bank regulation. Reopening the books on bank regulation is a good idea.

The Fed is only one of many central banks making changes

The central meeting in Portugal was a very interesting and eye-opening event that finds us viewing other central banks as having the same desires for policy change that we’re finding from Kevin Warsh in the US. However, onlookers in the US are very ethnocentric, and they like to look at these policies as being US policies and now as policies that are being addressed by Kevin Warsh, who’s the emissary of Donald Trump and trying to undo all the wonderful policies that were put in place under Jerome Powell. And while you can take this personal and political view of policy, it seems to me that there’s a much broader set of factors at work and that a number of things that were done since the great financial crisis haven’t worked very well, and this includes some of the actions taken during COVID. Now is a very good time to take another look at them, and we’re already seeing this being done at the Bank of England and at the European Central Bank, so why shouldn’t the Fed join in on this too? And why should people view this attempt to reform the Federal Reserve by Kevin Warsh as being politically motivated when it has all the hallmarks and trappings and being motivated by what has been a failed policy? The Fed has allowed inflation to overshoot its target for five years running. Is that really acceptable and what people want going forward?

Near term policy challenges

Interestingly, people who are trying to attack Kevin Warsh’s policies largely support what Jerome Powell had been doing, and what they’re accusing Kevin Warsh of doing would only be a continuation of what Jerome Powell had been doing! Nonetheless, at his first FOMC meeting, Kevin Warsh’s Fed took away the easing bias that had been present from the Powell Fed since the Fed hiked rates to their peaks in the wake of its actions to damp the inflation created by COVID. Warsh does claim there is the prospect of productivity down the road that could help alleviate inflation, and in the nearer term, oil prices that have spiked have come off of their peaks, providing a reasonable expectation that inflation is going to move lower in the coming months in any event. It’s still an open question of how soon inflation is going to move down and whether the decline in inflation is going to fully embrace core inflation as well. However, these are not reasons to attack Warsh for his views on productivity. Policy still has to make its choices, and the first choice that the Warsh Fed made was to remove the easing bias, which should be taken as a step in the right direction.

Outlook for policy

The outlook for policy remains unclear since Warsh has a reform agenda and we don’t know what he’s going to be able to reform or what the various task forces will recommend. Jerome Powell’s staying on at the Board of Governors means that the board is still dominated by members of the committee that largely were there and responsible for the current regulatory and policy framework that exists (and has not been working very well). Trump has not been able to appoint 4 members to the Fed’s Board of Governors, which would give him a majority and perhaps enhance the possibility of his being able to get the regulations through that he wants. Even if Kevin Warsh gets the recommendations that he wants from his task forces, they would have to be approved by the Board of Governors, which is still dominated by pre-Trump appointees. As a result, it’s hard to see the task forces as any particular threat to how the Fed conducts policy, and only the most cynical would think that Kevin Walsh is there trying to do the bidding of Donald Trump to change the Fed and put it under his thumb since there’s no evidence whatsoever that that’s what’s happening. All the evidence is that Warsh has been looking at the facts and sees the facts in the same light as other central bankers globally are seeing them. He’s looking to make changes to make policy in a better, more effective way. It’s pretty hard to be opposed to that.

Is the Fed more independent?

Will any of that make the Fed more independent? Well, I don’t know. But if the Fed is able to take control of the mechanisms to make monetary policy and is able to put new monetary processes in place and have them approved by Congress, which is its ultimate overseer, then if the Fed is able to stay in its own lane and obey the new rules that it wants to put in place, there’s no reason to think that the Fed would see independence harmed. In fact, with the new decisions by the Supreme Court, the Fed might even feel that it’s much more insulated and independent than it was before the Trump-Powell conflicts arose.

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