Image source: Wikipedia

Why is “Fed independence” important? Because the Federal Reserve is the guardian of the Cookie Jar. The Fed can create credit out of thin air, with the stroke of a keyboard. Its resources are effectively unlimited—that’s the Cookie Jar. History has shown when politicians gain access to the Cookie Jar outcomes can be disastrous.

But critics push back.

• “Independence does not mean lack of accountability.” Some may view Powell’s leadership at the Fed is so poor that “between four and six Governors and [regional] Presidents have to resign…if this happened at a Wall Street firm, the CEO would be out,” said Treasury Secretary Bessent in a CNBC interview on January 20, 2025, referring to the Federal Open Market Committee (FOMC).

• Bessent added that it would be a mistake for Powell “to put his thumb on the scale” by attending Supreme Court hearings related to the administration’s attempt to fire Governor Lisa Cook over alleged mortgage fraud.

• Other critics argue that the Fed has made colossal mistakes—most notably turning the recession of the 1930s into the Great Depression, fueling the Great Inflation of the 1970s, and, under Powell’s leadership, contributing to the inflation surge toward the end of the pandemic.

Let me untangle these issues and suggest a constructive path forward.

What is monetary policy?

Monetary policy concerns interest rates, the amount of credit in an economy, and the money supply. It is not about allocating credit to specific sectors—that is fiscal policy.

Since the 2008 financial crisis, the Fed has veered away from pure monetary policy and dabbled in fiscal policy. In our view, this is problematic because fiscal policy should be conducted by elected officials accountable to voters; when the Fed crosses that line, politicians take notice and based on past observations, begin to meddle.

Consider what we have identified as the original sin: the Fed’s purchase of mortgage-backed securities (MBS). It sounds innocent enough, right? After all, as the Fed has argued, it only purchases securities of government-sponsored entities, so they are quasi-government bonds. But it does not change the fact that by purchasing MBS, the Fed is attempting to pick winners—in this case the housing market. Because the transgression is considered minor by many, few cry foul. You may have noticed that President Trump recently instructed Fannie Mae to purchase MBS to help lower mortgage costs. Unlike Powell, President Trump made a political decision with political accountability. One can still question the wisdom of the decision: the goal of buying MBS is to lower borrowing costs, increase demand and push home prices higher. However, this may fail to address the root causes of affordability. Now it pivots to a political debate, which in our opinion, is the appropriate framework.

The Fed did not stop with MBS purchases. In its zeal to expand the “toolbox,” as former Chair Bernanke himself described it, the Fed deliberately developed ever more ways to micromanage the economy. Supporters argue that this approach reduces the likelihood of a recession. That may be true to the extent that insulating ever more actors from failure lowers near-term economic volatility. During the pandemic, the Fed even provided loans directly to businesses—an illustration of how far this philosophy has been taken. The core problem with these efforts is that they invite political scrutiny.

In our view, the Fed’s decision to pay interest on reserves, introduced during the financial crisis, continues to have especially poor optics: it involves paying banks billions of dollars each year.

It is in this context that one may say the Fed has only itself to blame for the current political scrutiny. Yours truly has complained about the Fed’s transgressions ever since the beginning of the financial crisis. It appears that Ivory-tower academics and Chair Powell still don’t get it. We believe reform at the Fed is long overdue, and Powell is not the person to lead it. He has blamed others for failures at the Fed, including what may be the most consequential mistake: maintaining an overly accommodative monetary policy in the face of a supply crunch.

But no—Powell should not be fired. Hear me out.

Fed Independence Matters

In a nutshell, Fed independence lowers borrowing costs for governments, businesses, and individuals—and is more likely to lead to lower inflation.

Let me start with the abstract explanation: when the Fed is independent, the Chair’s words have the potential to move markets—including calming them in a crisis. If there is credible political interference, then instead of using words alone, the Fed may need to intervene directly in markets—for example, by cutting rates—to achieve the desired effect.

A more illustrative explanation is that when the Fed loses independence, markets risk becoming unhinged and inflation might soar. We don’t know that for certain, but if history is any guide, really bad things may happen. If markets believe the Cookie Jar has been captured and opened by politicians, investors may vote with their feet. The result could be sharply higher bond yields, higher inflation, and eventually higher unemployment—along with the rise of increasingly populist politicians promising quick fixes.

We look at market gauges to assess whether markets are taking these jabs at the Fed seriously. Keep in mind that there is a tradition which long predates Trump to blame the Fed for the ills in the economy. The most important gauge may be long-term inflation expectations. Of course, we cannot know what inflation will be in the long term. That is precisely the point: these measures are confidence indicators in the Fed. The more tangible the indicator, the more difficult it is to disentangle it with other influences. Take the rising price of gold—I could write volumes about its causes. A loss of confidence in the Fed could be one factor, but only one of many. Or take rising bond yields: in an analysis last March, I attributed them to tariffs (tariffs don’t just impact the flow of goods, but also the flow of currency, reducing the demand foreigners have for US Treasuries); as such, while bond yields may well rise if there is Fed interference. There are many cross-currents that drive bond prices. Indeed, long-term bond yields would be expected to rise when policies increase a country’s growth potential.

Fed Governor Cook

As I write this, the Supreme Court is considering the administration’s attempt to fire Fed Governor Cook. Let me touch on the constitutional issue. The Coinage Clause (Article I, Section 8, Clause 5) grants Congress—not the President—the authority to coin money and regulate its value. That is why the Supreme Court has said the Fed is special.

In practice, matters are messy. Because Congress decided that the President nominates the Fed Chair, some argue the Chair should therefore serve at the President’s pleasure. Constitutionally, the proper path to remove a Fed Chair is through impeachment. By extension, the same logic could apply to Fed Governors.

But of course, nothing is simple in practice. Notably, the Fed’s role extends into areas such as banking supervision, parts of which arguably fall within the Executive Branch’s purview. In an ideal world, the Fed would focus strictly on monetary policy, with regulatory oversight handled separately.

Markets are watching closely because if the Supreme Court sides with the administration, there is a serious risk that investors will question whether the Fed is truly “independent.”

I am not commenting on the allegations themselves—only framing the issue.

A Path Forward

Part of the reason markets have taken the threat of Powell’s removal in stride is that his term ends in May. Powell is a lame duck.

The good news is that there is a candidate to succeed Powell who resigned as Fed Governor when then-Chair Bernanke failed to wind-down emergency measures after the worst of the crisis had passed—and who has since been consistent in criticizing the Fed’s transgressions. He has gone further, arguing that the Fed must overhaul its approach to monetary policy, its communications strategy, and—most importantly—exit its various fiscal experiments. He has blamed the Fed for inflating housing prices and for encouraging Congress to overspend by keeping rates artificially low.

He also believes we may be facing a productivity boom, a view supported by recent data.

Naysayers argue that this candidate is “desperate” for the job and is merely singing Trump’s tunes. While it is true that he spoke out more forcefully last year, his views have been consistent for more than 15 years.

The even better news is that prediction markets currently make him the front-runner. I am referring to former Fed Governor Kevin Warsh.

With Warsh as Fed Chair, a measure of calm might return to the Fed, with the potential for positive implications on rates and inflation. On inflation, Warsh has accused the FOMC of projecting higher long-run inflation than its stated target, arguing that if the FOMC does not believe its own target, why should the market?

Why not abolish the Fed?

Some ask “why don’t we abolish the Fed altogether?” They point to what has happened to the dollar since the Fed’s founding and refer to the number of times the Fed has been wrong. If someone would propose a replacement system that truly constrained government spending, I would be eager to hear it.

However, it appears we are in an era of unsustainable deficits. Governments have an incentive to debase a currency’s purchasing power in order to reduce the real value of their debt. In that sense, the interest of governments and citizens is not aligned. Government will do what is in its self-interest and, for example, a gold standard that imposes spending discipline, is not. In plain English, a gold standard would likely break down quickly in today’s world of ever-expanding entitlement spending.

Be careful what you wish for: if Congress gets its hands on the Fed, the result is more likely a scramble to claim and reach into the Cookie Jar than a return to fiscal discipline.

Don’t get me wrong. I believe unsustainable deficits are the biggest national security threat the US is facing. On the monetary side, the way to support a sustainable path, in my view, is to pursue sound monetary policy. Then work on fiscal sustainability through measures to boost growth and productivity and enact entitlement reform. The last part is likely the hardest.

Outlook

I write this as someone managing approximately $4 billion in precious metals and mining investments, as of this writing. If Kevin Warsh becomes Fed Chair, all else being equal, I believe that would be a headwind for our investments.

In practice, “all else being equal” rarely applies. In the short-term, the markets may not react to a change in the Fed Chair. This may be due to Powell’s working constructively on succession. A few weeks ago, he used language around productivity gains in a press conference that both Kevin Warsh and Kevin Hassett—who appeared to be the top contender at the time to succeed Powell—have emphasized. The short-term path of interest rates is more likely driven by the economy than by the Chair’s ego.

Ultimately, I believe the debate over Fed independence is not academic. It is about who controls the Cookie Jar when fiscal pressures mount. In my view, an independent central bank has the potential to try to keep the lid on; a politicized one risks it will be ripped open.

To end on a more somber note: my view is that absent entitlement reform and with a deteriorating fiscal trajectory, central banks—as former ECB President Mario Draghi demonstrated—will ultimately do whatever it takes.

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