THE FED IS FLAWED, POLITICIZATION MAKES IT WORSE

The following information was released by the Independent Institute:

By Phillip W. Magness

January 16, 2026

On Monday, Federal Reserve Chair Jerome Powell delivered a stark warning.

Responding to the Justice Departments subpoena and threat of charges, Powell said the move was a pretext: an attempt to pressure the central bank into setting interest rates according to political demands rather than economic evidence. He framed it as an unprecedented attack on Federal Reserve independence and vowed to continue doing his job without fear or favor.

Powell is right about the dangers of politicizing economics. But heres the uncomfortable truth: the Federal Reserve is far from a pristine institution devoted to public service, as Powell claims.

The Feds history is littered with mistakes. In fact, in an ideal world, central banks would not exist at allor, if they must exist, their mandate would be ruthlessly narrow. Throughout history, central banks have proven vulnerable to political influence.

Still, given the Fed we actually have, turning it into an arm of the White House would be far worse than preserving its imperfect independence.

If a central bank must exist, its powers should be tightly constrained. A small toolbox limits the ways in which political actors can manipulate monetary policy. Unfortunately, the modern Fed has amassed an expansive arsenal: rate setting, quantitative easing, emergency lending facilities, market backstops, and regulatory authority over vast swaths of the financial system. In recent years, left-leaning figures in the Feds governance even tried to steer the central bank into climate change and Diversity, Equity, and Inclusion initiatives. Each additional tool creates another lever that politicians can pullsubtly or overtlyfor their own ends.

Yet even with an overly powerful Fed, a degree of institutional independence remains preferable to direct political control. Elected officials face overwhelming incentives to maximize short-term economic performance, especially heading into elections. That typically means pressuring the central bank to juice growth through easy money, to monetize deficits, or both. The long-term costsinflation, financial instability, and currency debasementbecome someone elses problem.

This is what makes Donald Trumps use of lawfare against Powell (and previously against Governor Lisa Cook) so alarming. These actions can only be interpreted as attempts to bring the Fed to heel, clearing the way for more direct presidential control over monetary policy.

Given the Feds already-flawed incentive structure, this move risks making policy even more subservient to White House priorities rather than economic realities.

Unfortunately, we already know what those priorities look like. The Trump White House has made no secret of its desire for a sharp, economically imprudent reduction in interest ratesfar beyond the cautious, incremental cuts the Fed has begun as it unwinds the aggressive hikes used to combat Biden-era inflation. The goal is clear: a burst of short-term monetary stimulus to goose the economy, regardless of the downstream consequences.

The clearest signal comes from Trumps second-term appointee to the Fed, Steve Miran. At monthly board meetings, Miran has repeatedly pushed for dramatic rate cuts that are wildly out of sync with the rest of the governors, including those who favor modest and gradual easing. His proposals are not evidence-based disagreements, but radical departures from any serious consensus about how to manage inflation risks.

Worse still, Mirans views are not grounded in sound economics. He has a long public record of advancing fringe theories centered on tariff protectionism and an explicit scheme to devalue the dollar as a backdoor default on U.S. national debt.

These ideas are not merely unconventional; they are dangerous. Intentionally weakening the dollar and slashing rates to finance deficits risks triggering capital flight, renewed inflation, recession, or something far worse.

If Mirans positions are a preview of what monetary policy would look like under a politically subservient Fed, then the campaign against Powell is not just a personal or institutional dispute. It is an existential threat to the long-term health of the U.S. economy.

The Fed may be deeply imperfect, but weaponizing the justice system to bend it to presidential will would make everything worse. Preserving Fed independence is not an endorsement of everything the Fed has done. It is a recognition that when monetary power is vast, politicizing it is the fastest way to ensure it is abused.