We’re going to talk about Fed independence today… and a secret plot that may be brewing. But first, I hope the summer months are treating you well!
Up here in the Virginia highlands, we’ve had more summer storms and heavy rains than I can remember since we’ve been here. There’s something aesthetic about a good storm, and the rain keeps everything green.
But it turns out that Mother Nature is a force to be reckoned with… and we learned that this week when a torrential downpour washed out part of our gravel road. Here it is:
This hasn’t happened in the twelve years we’ve lived here on the frontier. That river of muddy water rushed down from the mountain and worked its way across the road and down into the river. Amazing.
Almost as exciting as roads washing out, we were talking about interest rates last time we spoke. Specifically, went examined the three key interest rate benchmarks and how each impacts rates throughout the economy.
The key takeaway we came to was that the Federal Reserve (the Fed) no longer controls long-term interest rates. The only benchmark it controls is the Federal Funds Rate, which influences short term rates (up to 2 years)… and that’s it.
So the conclusion we came to was that, even if the Fed were to cut its target rate aggressively, there’s still no guarantee that long-term Treasuries or mortgage rates would go down. As evidence, the 10-year Treasury and the 30-year mortgage rate actually went up immediately after the Fed cut its target rate last year.
Regardless, the Trump Administration has not stopped pounding the table on their desire for the Fed to cut rates. In fact, President Trump tripled down on his attacks on Fed independence. He recently said that the Fed should cut its target rate to 1% – which is three times lower than where it is today.
This further fueled media speculation that Trump might try to fire Fed Chair Jerome Powell. CNBC even asked Treasury Secretary Scott Bessent if someone could be both Fed Chair and the Treasury Secretary in a live interview.
Bessent responded, “Hasn’t been done since the 1930s…”
“That’s not a no,” the reporter quipped. Bessent paused and didn’t elaborate much on the matter.
You can intuit a lot from watching someone’s body language in conversation… and I think Bessent’s body language was telling in this interview.
We don’t know for sure what conversations about Fed independence are taking place behind closed doors, but I’m sensing something of a shift in direction from the current administration.
It started with a changing narrative on the DOGE efforts…
On the campaign trail, their messaging was that DOGE would cut $1 trillion in wasteful government spending so they could balance the budget and maybe even pay down some of the national debt.
All that talk is gone.
To be fair, they are cutting some waste. But it’s not nearly on the scale as originally promised.
Now the narrative has shifted to focus almost exclusively on economic growth. Bessent is on record as saying that “we just need to grow our way out” of the budget deficit. And that’s what gives us insight into the moves they may be setting up…
Trump has made Fed independence a central talking point for weeks now. There’s a reason for this…
Now, Trump is not actually going to fire Jerome Powell. I’m not sure such a thing is even possible. But even if it was, doing so would create too much negative press for Trump, which would be counter-productive for his agenda.
However, Powell’s term ends on May 15, 2026. That’s only ten months out.
Given Bessent’s comments and body language in the CNBC interview, what if Trump doesn’t plan to simply appoint a replacement for Powell next May? What if he’s setting up a frontal assault on the concept of the Fed’s independence?
Modern economists hold up an independent central bank as sacrosanct today. But that wasn’t always the case…
I think it’s largely been forgotten, but the Banking Act of 1935 infused the Federal Reserve with a range of centralized powers and autonomy that it did not have previously.
Prior to that legislation, there was no Fed Chairman. The position didn’t exist. Instead, the Treasury Secretary led the Fed’s Board and had a strong say in its monetary policy directives.
Could it be that the Trump Administration will try to repeal the Banking Act of 1935 and completely rein the Fed back in? Breadcrumbs are starting to point in that direction.
It’s going to be interesting to see how it plays out. And there will be some major implications for our finances and investments as well.
More to come…
-Joe Withrow
P.S. We’re working diligently behind the scenes to put together a live 3-day workshop next month. We have never done anything like this before, but I’m excited about how it’s coming together.
We’ve scheduled the 3-day challenge for August 20th, 21st, and 22nd at 3:00 pm Eastern. Please mark your calendar if you might be interested.
I’ll have more details for you closer to the event as we iron everything out. But our main focus will be to provide attendees with a much deeper and more nuanced lens on the core financial challenges that we face today. Then we’ll provide a comprehensive solution with action steps that you can begin implementing right away.
I’ve only done short single-session webinars up to this point… and there’s only so much you can fit into that format. Our 3-day challenge will be much more nuanced and I think much more immersive. More details to come!