Jim Freedman is a leadership consultant and author. In recent days, since this piece was written, President Donald Trump has publicly called Federal Reserve Chair Jerome Powell "a stubborn moron" for failing to lower interest rates.
BRATTLEBORO-The Federal Reserve, often called "the Fed," is one of the most important institutions in the U.S. economy. The Fed, created by the Federal Reserve Act, signed into law by President Woodrow Wilson in 1913, manages the nation's monetary policy - particularly through setting interest rates - and its role has profound implications for inflation, employment, and economic growth.
At the heart of its effectiveness lies one essential principle: independence from political interference. Allowing elected officials to influence interest rates would not only compromise the Fed's credibility but also risk plunge the economy into instability, inflation, and short-term policymaking driven by motivation of electoral gain rather than economic well-being.
The Fed's primary responsibilities include controlling inflation, promoting maximum employment, stabilizing the financial system, and ensuring moderate long-term interest rates. Arguably, its most powerful tool to achieve these goals is adjusting the federal funds rate, the interest rate at which commercial banks lend money to one another overnight to meet reserve requirements.
While this may seem like a technical matter, the federal funds rate affects nearly every interest rate in the U.S. economy - mortgages, credit cards, auto loans, and business financing. When the Fed raises this rate, borrowing becomes more expensive, which cools consumer spending and business investment, helping to slow inflation. Lowering it has the opposite effect, stimulating economic activity.
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In this way, the federal funds rate serves as the central lever for steering the economy toward stability and sustainable growth. Even small changes in this rate can ripple throughout the financial system, so it must be managed with great care - guided by data and expertise, not political expediency.
Independence allows the Fed to make decisions that are in the long-term interest of the economy, even when they may be politically unpopular in the short term. Raising interest rates might be necessary to fight inflation, but doing so could slow the economy and hurt a president's reelection chances.
If politicians were to control the Fed, they might pressure it to keep rates artificially low for political advantage, risking long-term economic harm. Elected officials could be tempted to cut rates before elections to stimulate growth and win votes - only to saddle the country with inflation, asset bubbles, and long-term instability. Monetary policy would become reactive, shortsighted, and driven by politics.
Even more dangerous is the impact on the U.S. dollar's role as the world's primary reserve currency. A reserve currency is a currency that is widely held by governments and institutions around the world as part of their foreign exchange reserves. It is used in global trade, financial transactions, and international debt settlement.
Today, the U.S. dollar holds that position - a status built on trust in the stability of the U.S. economy, its financial institutions and, above all, the independence and credibility of the Federal Reserve.
This privileged position gives the United States immense economic advantages. Because the world demands dollars, the U.S. is able to borrow money at lower interest rates and run trade deficits without immediate consequences.
Oil and most global commodities are priced in dollars, reinforcing the dollar's dominance. It gives U.S. financial markets unmatched liquidity and depth. If the Fed were seen as politically manipulated, global confidence in the dollar could waver.
Nations and investors would diversify into other currencies, like the Chinese yuan, a result that the Chinese Communist Party dreams of every night. This would raise borrowing costs in the U.S., weaken the dollar, and erode America's economic influence around the world.
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The Fed was deliberately structured for independence and for keeping monetary policy focused on economic health, not political gain. Its governors serve long, staggered terms, and its 12 regional banks provide economic data and analysis from across the country. While it reports to Congress and is subject to oversight, it does not take orders from the White House.
Most importantly, the chair of the Federal Reserve cannot change interest rates unilaterally. To change the federal funds rate, the Federal Open Market Committee (FOMC) must reach a majority vote among its 12 voting members, seven that are members of the Federal Reserve Board of Governors appointed by the president and confirmed by the Senate. The remaining members are regional Federal Reserve Bank presidents: the president of the New York Fed, who has a permanent vote, and the remaining four rotating among the other 11.
So firing the chair of the Fed will have little real influence on the federal funds rate, but it would most likely have a shockingly severe impact on the credibility of the Federal Reserve System, both inside and beyond the borders of the United States.
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Since its creation in 1913, the Federal Reserve has had 16 confirmed chairs. Not one has ever been fired, dismissed, or forced out. All have either served their full term, resigned voluntarily (often for retirement or to take another position), or chosen not to seek reappointment.
Jerome Powell was appointed chair in 2018 by President Trump for a four-year term. In 2022, he was reappointed by President Biden for a second four-year term, running through 2026.
The temptation to politicize the Fed is always present - but the costs are predictably catastrophic. Just as importantly, global faith in the dollar - and the economic strength that comes with it - depends on a central bank that is trusted to act independently and responsibly.
In a time of mounting fiscal challenges and international uncertainty, preserving the independence of the Federal Reserve is not just wise - it is essential to America's long-term prosperity and global leadership.
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