The Dangers of an Independent Federal Reserve System
While Federal Reserve Chairman Jerome Powell is widely regarded by markets as having caved in to President Trump and having agreed to tone down the Fed’s rate hikes in 2019, some of his other statements have been less well publicized. Among them was his assertion that he would not step down from his position if asked by the President. That’s a dangerous sign of a Federal Reserve System that sees itself as unaccountable to anyone but itself.
It’s important to remember that as much as the Fed likes to think of itself as independent, it really isn’t. The Federal Reserve System was created by Congress and the Fed’s Board of Governors is an executive branch agency. The Fed barely pays lip service to Congressional oversight, believing that testifying for a couple of hours twice a year is sufficient to inform Congress of everything it is doing. And now that we know that Chairman Powell wouldn’t step down if asked to, we know that the Fed doesn’t see itself as beholden to the President either.
No one wants to see the President getting involved in the nitty-gritty of monetary policy, although we know that Presidents throughout history have pressured the Fed to ease monetary policy in order to aid election wins. Nor does anyone want to see Congress calling the shots either, as most Congressmen don’t have any understanding of basic economics, let alone monetary policy. But that leaves us then with the Fed and its unelected bureaucrats in complete control of monetary policy and responsible to no one, and that’s a problem.
The crux of the issue is that monetary policy itself is a problem. Involving government in monetary affairs guarantees interventionist policies that benefit the federal government and the banking system at the expense of taxpayers and savers. A Fed that is allowed to do whatever it wants to do without being taken to task either by Congress or by the President is a Fed that is out of control and in need of being reined in.
Powell’s comments should be a warning to investors that the longer they keep their assets in the financial system the more they are in danger. Powell will ensure that the Fed will do what it wants to and won’t answer to anyone. Given the Fed’s history in weakening the dollar and inflating the money supply, expect to see even more dollar devaluation as the economy weakens this year. Investors who haven’t started moving their assets into gold already need to start thinking about it sooner rather than later. If it comes down to a showdown between the Fed and the President, investors don’t want to get stuck in the middle.