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https://www.wsj.com/economy/central-banking/get-re...
Get Ready for the End of Fed Independence
Markets haven’t yet grappled with the implications of the president having control over the central bank

By Greg Ip, The Wall Street Journal, 8/27/2025

The market response to President Trump’s Monday attempt to fire a Federal Reserve governor was relatively subdued.

Don’t let that fool you. If Trump’s effort to remove Lisa Cook for cause succeeds, and perhaps even if it doesn’t, this week will go down as one of the most consequential for financial markets in decades.

It could mark the end of the Federal Reserve’s independence from White House control, which it effectively obtained in 1951. As a result, inflation is likely to be higher and more volatile than in the decades before 2020….

Investors would be wiser to assume that starting sometime in the next nine months, the Fed will set rates according to Trump’s preferences….

Trump-appointed governors wouldn’t necessarily control the Fed’s decisions immediately, because five of the 12 members of the rate-setting Federal Open Market Committee are presidents of the reserve banks. But the board has authority over those presidents, and could force any or all of them out of office by early next year…. [end quote]

This would add to the inflationary Macro trends already in place.

New tax bill with very high deficits = fiscal stimulus.
Tariffs directly increasing consumer prices.
Removing immigrant labor leading to higher labor costs.
Trump forcing Federal Reserve to cut interest rates, both short-term (fed funds rate) and by re-starting QE to suppress interest rates on long bonds.

Of course, Trump could also pressure the BLS to report inaccurately low inflation rates for political reasons by firing any bureaucrat who dares to report the truth. (Just as he did with the employment figures.) But reporting wrong numbers doesn’t change the fact that inflation will increase.

The Wall Street Journal has warned of the impact of Trump controlling the Fed in an editorial.

https://www.wsj.com/opinion/donald-trump-lisa-cook...
What if Trump Runs the Federal Reserve?
His firing of Lisa Cook shows he wants to put monetary policy under his personal control. He may succeed, but the country will live to regret it.

By The Editorial Board, The Wall Street Journal

…

We know from history what happens to central banks that become arms of politicians. See inflation in Turkey under President Recep Tayyip Erdogan and in Argentina for decades. Richard Nixon jawboned then Chair Arthur Burns to keep monetary policy easy, and the result was the 1970s great inflation…. [end quote]

The stock and bond markets have not reacted to Trump’s firing of Fed Governor Lisa Cook, which she intends to fight in court. If he replaces Cook, he will have appointed four of the Fed’s seven governors.

The power of the Federal Reserve Board goes beyond voting on rates. Members also approve and reappoint the Fed’s regional presidents, who are responsible for financial regulation in their region, including funding for bailouts. In February, all 12 presidents’ terms will expire, and they will need to be reappointed by the board. A board loyal to Trump could fire all the regional presidents and replace them with Trump loyalists.

This is not just an economic trend change but a sea change in the way the economy will be managed. Not since the 1970s has a president meddled so directly with monetary policy.

Wendy

Seems Greenspan was pretty good at bending to political influence. The #43 regime wanted to enact a string of "supply side" tax cuts, so Greenspan invented a scenario where a large volume of US Treasuries was desirable, and the path than #42 had the country on, of paying off the Federal debt, would cause problems.

More broadly, Presidents have been pressuring the Fed, and private companies, for decades. The process was called "jawboning".

Jawboning (usually uncountable, plural jawbonings)

Persistent persuasive talk, particularly (politics, economics) talk that includes implied threats of punitive action, such as tighter government regulation.

https://en.wiktionary.org/wiki/jawboning

Steve

Dying penniless is not exactly a sea change. It is a lifestyle change. Good luck with that.

More broadly, Presidents have been pressuring the Fed, and private companies, for decades. The process was called "jawboning".

Steve,

There is a world of difference. The prior presidents were not authoritarian dictators.

Seems Greenspan was pretty good at bending to political influence.

That’s true, but he was a fool. His laissez-faire attitude nearly destroyed the world economy, and his Ayn Randism was responsible for several years worth of nonsense.

Arthur Burns also gave in to political pressure when Nixon cajoled him into lower rates prior to election, but the inflation soon got out of control and it took Carter to appoint Volker, who put the stiff medicine into the patient - and cost Carter the election.

Two cases don’t make a trend, necessarily, but both the violators were Republican, and both of the Presidents who left the Fed alone to fix it were Democrats. And we have a Republican (in name, anyway) in office again. In this case the trend is not your friend, methinks. Calling Murphy! Don’t you have a law that covers this or something?

Maybe we are rationalizing this in the wrong way. Everyone's hair is on fire due to the Administration's actions promoting higher inflation than the Fed's target.

Maybe their goal is to address the oversized national budget by reducing the value of the dollar and inflating our way out of debt. To all of us, that's insane and tantamount to blasphemy, but it's no more screwy than a lot of the other stuff that the Administration has been doing over the last few months.

In that context, take this as a serous warning by Wendy and try to contextualize your investments accordingly. The challenge, should this unlikely event take place, will be the response of the markets, once they realize what's happening and the unpredictable chaos which it may cause, to what will provide a way to protect the value of your assets.

It would be interesting to evaluate what has worked elsewhere in different times (though I can't think of when, in the past, the world's leading economy committed financial suicide).

Jeff

Maybe their goal is to address the oversized national budget by reducing the value of the dollar and inflating our way out of debt.

Their goal is to juice the economy so they can remain in power.

Two cases don’t make a trend,

Seems I recall Greenspan also being criticized. in the early 2000s, for the interest rate suppression that helped inflate the real estate bubble, that popped a few years later.

Three bent Fed Chairmen? Bernanke gave AIG $85B, for the ease and comfort of it's counterparties, even though it was not a bank within the jurisdiction of the Fed.

So, seems Powell's problem is being unwilling to bend to the demands made of him, in the face of a history of the Fed being a tool of the administration.

Steve

Where to hide ??? Perhaps there are capital gains to be made, by selling Treasuries before
their maturity date. I'm really not interested in any fixed income paying < 4%, as far as
using them for some cash flow. How do stocks do in stagflation ? I'm seeing inflation
in the grocery stores right now, and the tariffs haven't fully kicked in ( I think, he's so
spastic with his tariff proclamations and decrees that I not sure what is in effect ).

Have been pricing trucks, and decided to just keep the one I have, as I am seeing
noticeably higher prices than last year. Last year, I was seeing Chevy Colorado Z71's for
approximately $36-37K. Online search at local dealerships show prices just under $50K
for the same model. Screw that.

But yeah, tariffs are not inflationary, just ask Trump.
Americans gonna be doing some serious whining, very soon.

Their goal is to juice the economy so they can remain in power.

And dress it up with a vector of the "supply side" narrative, something along the lines of "our policies will produce so much growth that GDP growth will exceed inflation, no matter how high it is". They will probably find an economist that will create a narrative claiming to show that decades of World Bank imposed austerity programs, meant to restore financial soundness to countries have, instead, only created recession, to legitimize the program.

Steve

UpNorthJoe asked, "How do stocks do in stagflation ? "

Let's take a look at the nominal and inflation-adjusted S&P500 between 1970 and 1980.

https://www.multpl.com/s-p-500-historical-prices

https://www.multpl.com/inflation-adjusted-s-p-500

The nominal S&P500 stagnated between 1970 and 1980 but the inflation-adjusted value fell.

Let's look at the 10 Year Treasury bond.

https://fred.stlouisfed.org/series/DGS10
https://fred.stlouisfed.org/series/REAINTRATREARAT...

The real yield of the 10 YT was always positive because the bond market vigilantes required a positive yield over inflation. This was true until the Federal Reserve's QE after the Great Financial Crisis.

There was no such thing as a TIPS in the 1970s but nowadays TIPS are guaranteed to yield over the rate of inflation.
Wendy

UpNorthJoe asked, "How do stocks do in stagflation ? "

It is a great question to ask.

We have higher levels of inflation right now.

The risks are unemployment soaring and deflation. The risks are over the horizon. We are approaching the horizon fast.

thanks for the graphs !

So, no place to hide from stagflation. But TIPS are a better bet than stocks, if
we can trust that TPTB will not gerry-rig the inflation numbers. All assuming that a new
bout of stagflation plays out like the 1970s version.

Your 1st graph shows that in nominal terms, from 1-1-70 to 1-1-80, stocks had a "return" of
2.07% per year. Using the #'s from the graph, $90.30 invested on 1-1-70 was worth $110.90
on 1-1-80. Not good, even ignoring inflation.

Your 2nd graph shows that adjusted for inflation, the market lost 36% of it's value during
the same timeframe. Really not good. That $110.90 bought only $70.98 in 1970 currency.
Ouch.

A comment on Wendy's comment:
"There was no such thing as a TIPS in the 1970s but nowadays TIPS are guaranteed to yield over the rate of inflation."
______________________________________________

This indicates the importance of a credable Bureau of Labor Statistics as a number designed to placate politicians will impact evryone - whetther invested in TIPs, receiving Social Security or purchasing in a store.

Jeff

From the TD ( Treasury Direct ) website:

" We sell TIPS for a term of 5, 10, or 30 years.

As the name implies, TIPS are set up to protect you against inflation.

Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.

When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.

TIPS pay a fixed rate of interest every six months until they mature. Because we pay interest on the adjusted principal, the amount of interest payment also varies.

You can hold a TIPS until it matures or sell it before it matures.From Treasury Direct"

Also from TD:
"The principal of your TIPS goes up and down with inflation and deflation. While the interest rate is fixed, the amount of interest you get every six months may vary based on any change in the principal. Those changes are tied to the Consumer Price Index from the U.S. Department of Labor, Bureau of Labor Statistics."



My thoughts:
So a TIPS purchase will stay at the same interest rate thru the bond's duration.
The principal value is what is adjusted for inflation.

If a $25,000 TIPS is purchased, and inflation rose by 2% at the 1st evaluation date,
then the principal is increased to $25,000 *1.02 = $25,500. This new principal
value is multiplied by the fixed interest rate at time of purchase. For example, if
int-rate at purchase was 1.8%, then the interest payout to the holder would be
( $25,500 * 0.018 )/ 2, since the interest is evaluated and paid twice a year.
This adjusted principal value is cumulative, at the 2nd evaluation, if inflation
is 2%, then the inflated $25,500 figure is multiplied by new 2% rate, and this newest
principal value is multiplied by the original fixed interest rate.
And at the maturity date, the holder gets either their initial $25,000 back, or
whatever greater value the principal has been inflated to. A 5 year TIPS
would be evaluated twice per year, or 10 times over its maturity.

I've never owned a TIPS before, does the above sound correct ?
If inflation was 2% over the entire 1st year, at the end of year 1 would the
principal be $26,010 ?

I just used a pen&paper and calculator, assumed $25k initial purchase,
inflation was 2% all 5 years, and the fixed int-rate was 1.8%. At the end of 5 years,
principal was $30,473, and total payments over 5 years was $2510. This gave a total return
of 5.7% per year. Does that sound about right?

I would make purchase in IRA, so both interest and principal capital gain are
just thrown in the pot, and will be taxed as income whenever money is withdrawn
from IRA ( ie no difference, in an IRA, than any of the others assets in IRA ).
I can see owning a ladder of 5 year TIPS in IRA. The next 5 year auction is
in October. Would have to do that basically once a year, every year for a 5 year
ladder till death.

I would pull the plug on the ladder purchases if after year 1, it appeared that the
current administration was cooking the books in regards to inflation. That is a
very real risk, imo, but with just 1 year purchase it wouldn't be a big deal.
My attitude would be Ok, ya screwed me once, won't let it happen again.

That sounds about right. Add to that, then maturity event.

As an example, I just picked up some CUSIP 912810SV1 U S TREASURY NOTE INFLATION INDEX NOTE .125% 02/15/51 02/15/21 in my IRA. The price is currently is a substantial discount from par ($1,000 investment will get you about $1,500 of bonds, which gives you quite a bump when they approach maturity) as the worst yield to maturity is .669% compared to the .125% coupon. I don't need the income to live on and I'm guessing I will "mature" before the bonds do, but it seems like a conservative way to cache the money (rather than cash the money) at this stage of the game without being taxed on the bond's capital growth.

As everyone's circumstances are different, and my guess is no better than yours about the relevancy of the inflation figures the government will report in the future, please don't take this as investment advice.

Jeff

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