Bessent's opinion article seems to indicate that the Trump administration's criticism of the Federal Reserve is escalating, no longer merely calling for interest rate cuts but also beginning to question the overall operational model of the Federal Reserve and the foundation of its independence as an institution.

Author: Hou Xintong, Yicai

As markets and other central banks around the world express concerns and doubts about the Trump administration jeopardizing the independence of the Federal Reserve, U.S. Treasury Secretary Scott Bessent recently published a signed opinion article stating that the problems within the Federal Reserve, including policy missteps and functional expansion, are what have put its independence in jeopardy, and he called for an independent and comprehensive review of the Federal Reserve.

Bessent traced back to the 2008 financial crisis, stating that one might think the new tools created after 2008 and the centralization of financial markets would give the Federal Reserve a deeper understanding of the direction of the economy, or at least enable it to guide the economy more effectively. However, this was not the case. In 2009, the Federal Reserve predicted that real GDP would accelerate to 4% in 2011. Instead, growth slowed to 1.6%. During this period, the Federal Reserve's two-year forecasts cumulatively overstated real GDP by over $1 trillion. "Repeated missteps indicate that the Federal Reserve is overly confident in its abilities and the expansionary fiscal policies to stimulate growth. When the Trump administration shifted to tax cuts and deregulation, the Federal Reserve's forecasts became overly pessimistic, highlighting its reliance on flawed models and neglect of supply-side side effects." He added that the continuous interventions during and after the 2008 financial crisis provided de facto support to various asset owners, while younger and less affluent families were excluded from asset appreciation, thus suffering the most from inflation.

In addition to policy missteps and exacerbating wealth inequality, Bessent further wrote that the Federal Reserve's "ever-expanding footprint" has profound implications for its independence. By expanding its authority into areas traditionally reserved for the fiscal sector, the Federal Reserve has blurred the lines between monetary and fiscal policy. The Federal Reserve's balance sheet policies directly affect which sectors receive capital, intervening in areas that should belong to the market and elected officials. He stated that the entanglement of the Federal Reserve with Treasury debt management also creates a perception that monetary policy is being used to meet fiscal needs, allowing the president and Congress to rely on the Federal Reserve to rescue the government after poor fiscal choices.

Furthermore, Bessent wrote that the Federal Reserve's excessive regulation has also exacerbated the problem. The Dodd-Frank Act significantly expanded the Federal Reserve's regulatory scope, making it the primary regulator of U.S. finance. Fifteen years later, the results are disappointing. The collapse of Silicon Valley Bank in 2023 illustrates the dangers of combining regulation and monetary policy. The Federal Reserve's oversight of its regulated banks, including lending and setting profitability calculations, creates an inevitable conflict that blurs accountability and jeopardizes independence. He proposed that a more coherent framework would restore specialization: authorizing the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to lead bank regulation while allowing the Federal Reserve to conduct macro oversight, be responsible for last-resort lender liquidity, and manage monetary policy.

"The Federal Reserve's expansion of responsibilities beyond its statutory scope undermines its own credibility and political legitimacy. The excessive use of non-standard policies, mission creep, and institutional bloat threaten the independence of the central bank," Bessent concluded. "The core of independence lies in credibility and political legitimacy. The Federal Reserve's expansion has exceeded its authority, leading to threats to both its credibility and political legitimacy. Large-scale interventions have produced severe distributional outcomes, undermining credibility and threatening independence. Looking ahead, the Federal Reserve must reduce the distortions it causes to the economy. Unconventional policies like quantitative easing should only be coordinated with other federal government departments in true emergencies. An honest, independent, and non-partisan review of the entire institution is also necessary, including monetary policy, regulation, communication, staffing, and research."

Bessent's opinion article seems to indicate that the Trump administration's criticism of the Federal Reserve is escalating, no longer merely calling for interest rate cuts but also beginning to question the overall operational model of the Federal Reserve and the foundation of its independence as an institution. This situation also confirms the previous concerns of market participants. As early as when the Trump administration suddenly slowed its pressure on Powell for interest rate cuts and instead seized on the Federal Reserve building renovation case, Swiss Pictet Wealth Management's senior economist in the U.S., Cui Xiao, told Yicai that the Trump administration might want to use the renovation case as a pretext to propose more regulation and mechanism reforms for the Federal Reserve, which would create greater operational space and possibilities than simply dismissing Powell.

Trump's preferred successor for the Federal Reserve chair, Waller, has also previously called for a comprehensive reform of the Federal Reserve's operational methods and suggested drafting a new "Treasury-Federal Reserve Agreement" to replace the 1951 Treasury-Federal Reserve Agreement, which former Federal Reserve Chairman Paul Volcker referred to as the "Charter of Central Bank Independence." "Once changes begin, many mechanisms become subject to reform and modification, akin to opening 'Pandora's box,'" Cui Xiao stated. This would make it easier for Trump to impose his policy proposals on the Federal Reserve.

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