Battle of the Ages

The Office of the Comptroller of the Currency was established over the fractured banking sector in 1863 & 1864 under the National Currency Act & National Banking Act, respectively. The goal was simply to establish a single currency to fund the Civil War and stabilize the inflation that would come of it.

During the reconstruction there was a ton of speculation on reconstruction. The railroads and land speculation was chief among all speculation but copper & gold speculation is not to be forgotten. The Deregulation of the banking industry expanded available credit and exacerbated the speculation. Speculation, gone unchecked, always leads to busts. There were multiple booms and busts (credit expansion & credit retraction) in each decade of following 1863.

In the long arch of history, society looks to conquer uncertainty at all costs. The Federal Reserve was created to put an end to this incessant cycle of credit and to institute some order from central command. The objective of the institution has changed over the years.

As you can see in the collapsible above, the mandates of the Federal Reserve have changed over time. This has a lot to do with its relationship with the government over time. In its incipiency, the Federal Reserve was under the Department of Treasury as a fiscal agent, both to manage the banking system and the government debt. During the Great Depression, the executive had a much closer relationship with the Treasury to implement fiscal policies and preserve the currency. The Treasury (an therefore the executive) had a lot of control over the Federal Reserve.

After the Second World War, the Federal Reserve began its track to the independence it has today. The Treasure - Fed Accord which separated government debt management from monetary policy.

The United States entered the Korean War in June 1950. With inflation on the rise, the FOMC felt strongly that the continuation of the peg would lead to excessive inflation. Throughout that year, the FOMC tried various tactics to raise short-term interest rates, but was successfully opposed by the Treasury.

The above excerpt is a key reason why, in the year 1951, the Federal Reserve was free from the Treasury's demands. The Federal Reserve further changed when the Federal Reserve Reform Act of 1977 was passed and changed the structure of the Federal Reserve by moving it away from the Treasury (and the executive) toward Congressional Oversight. The Depository Institutions Deregulation & Monetary Control Act of 1980 severed any control that the Treasury still had over the Federal Reserve, and strengthening their control of monetary policy. Using their newfound powers, the Federal Reserve began to resist the orders of the Treasury and flex its muscle under Alan Greenspan which solidified its independence.

However, the Federal Reserve's mandates require taking fiscal policy into account. Federal Reserve Chairman Jerome Powell has been pretty outspoken about the need to tame the deficit. What is rare and hasn't occurred too often, is a president who wants to claim authority over the Federal Reserve, until President-Elect Donald J. Trump.

The President is subject to political campaigns every four years, which means the executive has a rather short time preference in respect to life of a nation. It is not uncommon for the executive to turn to those in the economic sphere and lean on them to improve conditions so they might get reelected. Richard M. Nixon leaned on Arthur Burns in the 1970s to keep low interest rates despite rising inflation, and Mr. Nixon was ignored to combat inflation. Similarly, Mr. Ronald Reagan leaned on Paul Volcker to reduce interest rates, but Volcker ignored him too.

Most presidents have leaned on rhetoric to push the chairmen or chairwomen that have headed the Federal Reserve, but Mr. Trump is not your average president. He was toyed with the idea of pulling the central bank closer to treasury, and subsequently himself. He has also said that he would fire Mr. Powell, who responded to reporter questioning about the subject with, "[Firing the Federal Reserve Chairman is] not permitted under the law."

When I was a kid, my father talked to me about the Presidency of Bill Clinton, which in retrospect may have been the peak of American Prosperity. He told me he was watching the news and a reporter approached Mr. Clinton and asked him, "How does it feel to be the most powerful man in America?" Mr. Clinton, in his folksy humility pointed to Alan Greenspan and said, "You better go ask him."

I do not know if this happened. I wasn't there, but it is still a funny thought.

The Federal Reserve is under the Congressional Oversight in a time where Congress is the most ineffective body in the world. Why would they take the time to address anything going on in the FOMC? I would just like to set the tone for why I am nervous about this battle, regardless of the fact that it is highly unlikely considering the amount of protection the Federal Reserve has.

The Federal Reserve is an apolitical organization, except when you threaten their independence. It is clear that they favored Mrs. Harris over Mr. Trump as President Elect. I would hope that Mr. Powell is better than this, but he could weaponize his policymaking against the Trump Presidency. The IMF has said that the US Economy will begin to slow in 2025, and Mr. Powell can support the market less.

While we traditionally look at the easing of interest rates as market support, it is worth little while the Federal Reserve continues the pace of Quantitative Tightening at 25 Billion Dollars a month. Mr. Powell knows that a policy change on the balance sheet is coming soon but under a hostile executive, he may delay this support deliberately to reduce the party's success in its next election. Furthermore, he might delay the much needed Quantitative Easing or ease market conditions much less than he might otherwise.

On the other side of the coin, if congress managed to alter the relationship between the treasury and the central bank, Mr. Trump may influence policy to ease conditions too easily and reinvigorate inflation while reducing the authority of the Federal Reserve overall.

The U.S. Federal Reserve could carry out fewer interest rate cuts than previously expected next year should President-elect Donald Trump’s proposed global tariffs take hold, former Fed policymaker Loretta Mester said Tuesday. - CNBC Article

The mud slinging we might see between the executive and the chairman may be generational and could very well lead to a restructured relationship between the two. Every time inflation rises, the nature of the Federal Reserve changes and I believe Mr. Trump & his republican sweep may materialize some kind of change, even if it is just socially. Whatever may happen, I wonder whether Mr. Powell's successor will be in the pocket of the executive.

Let me be clear, the cost of this war between these entities will be nothing short of the fortunes of the American people and all the people who depend on the United States Dollar.