① In the process of selecting the next Federal Reserve Chairman, Bessant made no attempt to conceal his critique of the Fed's system through papers and public commentary; ② He essentially constructed a policy framework to support Trump's complaints about interest rates.
Central Bank Independence, like all other forms of institutional integrity, seems to have lost its appeal in Washington today…
Those who were once the staunchest advocates and defenders of the Federal Reserve's independence are gradually fading from the scene, replaced by staunchly partisan figures and monetary policy dissidents. With Federal Reserve Chairman Jerome Powell set to step down next May, President Trump has the opportunity to reverse his much-criticized 2018 appointment decision.
U.S. Treasury Secretary Scott Bessant's strict control over the selection process also means that, regardless of who ultimately succeeds him, this Treasury Secretary may "effectively" control the Federal Reserve.
Trump has repeatedly criticized Powell publicly, accusing him of being too slow in cutting interest rates, calling him a "fool" and "Mr. Too Late," and authorizing Bessant to vet candidates for Federal Reserve chairman. Earlier this month, Trump stated that he had narrowed down his shortlist to one candidate, and it was widely speculated that the White House would choose between two "Kevins"—White House National Economic Council Director Kevin Hassett and former Federal Reserve Governor Kevin Warsh.
In the process of selecting the next Federal Reserve Chairman, Bessant also made no secret of deepening his critique of the Fed's system through papers and public commentary—he essentially constructed a policy framework to support Trump's complaints about interest rates.
While Bessant continued to verbally emphasize the importance of the Federal Reserve's independence, he later made it clear that his definition of independence was not consistent with the definition generally accepted by the public.
In a recent article published in an academic journal, Bessant points out that the Federal Reserve has deviated from its traditional functions. During the 2007-2009 financial crisis and the 2020 pandemic, the Fed creatively developed a variety of tools to significantly expand its role in the economy, but lacked democratic legitimacy and oversight mechanisms.
Bessant believes this is particularly evident in the Federal Reserve's balance sheet —which, as of this month, still stands at approximately $6.6 trillion. The Fed has transformed its asset purchase program, originally intended for crisis response, into another policy tool to stimulate the economy, one that is more beneficial to asset holders such as homeowners and stockholders.
In her criticism, Bessant noted that the Federal Reserve has consistently overestimated the effectiveness of fiscal stimulus and underestimated the economic growth boost from tax cuts and deregulation. Bessant also stated that following the financial crisis and the 2010 Dodd-Frank Act, the Fed's responsibilities have expanded beyond financial regulation to include issues such as gender equality and climate change.
It is worth noting that although Bessant did not propose a specific structural solution, some other critics of the Federal Reserve have advocated for a re-examination of the 1951 Federal Reserve-Treasury Agreement.
This verbal agreement allowed the Federal Reserve to take control of its own balance sheet, thus ending the wartime arrangement that had transferred control to the Treasury. This was also the most important step the Federal Reserve had taken towards becoming an independent central bank since former Treasury Secretary Andrew Mellon. In 1932, Andrew Mellon stepped down from the Federal Reserve Board of Governors—he was the last person to hold positions in both institutions simultaneously.
Now, Trump is clearly challenging this "distancing" relationship.
Michael Milan, chairman of the White House Council of Economic Advisers, has taken leave of absence from the White House in recent months to fill a vacant seat on the Federal Reserve Board of Governors. While the U.S. Supreme Court has yet to rule on the president's dismissal of former President Biden's appointee, Tim Cook, the current U.S. administration has publicly stated its goal of securing a majority of seats on the Board of Governors for Trump's nominees.
According to the government statement, the selection criteria set by Bessant to succeed Powell have a clear purpose:
Any regulatory agenda must be aligned with the White House; interest rates should be significantly lowered (because concerns about tariff-induced inflation have been artificially exaggerated); the issuance and management of government debt should rest with the Treasury Department, not the Federal Reserve.
In some respects, the Federal Reserve has indeed been moving toward a more balanced approach favored by Bessant. Trump's newly appointed Vice Chairman for Supervision, Bowman, has begun cutting 30% of bank regulators. On the eve of Trump's inauguration in January 2025, the Fed also withdrew from the Global Central Bank Climate Risk Coalition, stating that the coalition's responsibilities exceeded the central bank's authority. Even Fed proponents—including former regulator Daniel Tarullo—acknowledge that the Fed has overstepped its authority in recent years.
In a recent report, Stephen Blitz, chief U.S. economist at TS Lombard, wrote that as the lines between the U.S. Treasury and the Federal Reserve become increasingly blurred, the balance sheets of the two institutions are moving toward “merging,” and Bessant has essentially become a “shadow Fed president” in this new structure.
However, this increasing political interference and functional ambiguity is quietly eroding the institutional credibility that the Federal Reserve has gradually built up since World War II.
To maintain financial stability and retain its role as lender of last resort, the Federal Reserve must employ effective tools to monitor, regulate, and manage financial and macroeconomic risks. Trump has repeatedly undermined the agency's authority by demanding interest rate cuts and calling for Powell's resignation. The core elements of his trade policy have changed arbitrarily daily, he fired the government's chief statistician over dissatisfaction with employment data, and he has fueled a speculative frenzy in the unregulated cryptocurrency sector—in which his family holds hundreds of millions of dollars.
The United States will inevitably face a new economic or financial crisis sooner or later. If the Federal Reserve loses its independence, the government will gain greater power. Central banks need to earn public trust and credibility to effectively control inflation and ensure credit safety—something Trump's Treasury Secretary has failed to provide.
Even more dangerous is that once the market forms a general expectation that "the Federal Reserve has become politicized," its policy signals will become ineffective, ultimately damaging the stable foundation of the US economy and the global credibility of the dollar.
(Article source: CLS)
