Declaring Fed Independence Fears False

Editors’ Note: MarketMinder is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market implications only.

How quickly things change! For several months, many analysts and investors worried our new Fed head would be a rate-cutting “sock puppet,” with the rest of the Federal Open Market Committee (FOMC) mounting little resistance as President Donald Trump fired anyone who wasn’t on board. But then new Fed head Kevin Warsh didn’t cut rates in June. The only forward-looking line in his first policy statement was a pledge to deliver “price stability.” And then, this week, the Supreme Court ruled Trump can’t fire Fed board member Lisa Cook. While no one is apparently writing a declaration, this week’s events go a long way to proving fears over the Fed’s independence are faulty. 

Regardless of Warsh’s (or any Fed head’s) rate preferences, the Fed head amounts to 1 vote of the FOMC’s 12. He or she steers the discussion and submits their preferred policy decision for scrutiny and amendment, but a decision requires consensus. Majority dissention from the Fed head’s choice, if it existed, would win the day. Hence, when Trump tried to fire Cook over alleged mortgage fraud, analysts presumed it was a means to him stuffing the FOMC with sheep. And if the Supremes ruled Trump could remove her before she finished contesting the allegations, headlines warned more firings would follow until the FOMC had a rate cut-happy majority—the end of Fed independence.

The Court’s decision quashed this. Not only did it block her immediate termination, letting her continue serving while her legal challenge wends through the lower courts, but it issued a full-throated defense of Fed independence. Consider this excerpt, with legal citations removed for reading ease:

“Like its predecessors, the Federal Reserve operates at a deliberate remove from the ordinary political process, including a budget free of congressional control, and policies set not only by [Fed] Governors, but also by representatives of the private regional banks. Not only the fact of independence but also the appearance of independence is key to the Federal Reserve’s design. That counsels a substantial threshold for [firing for] ‘cause.’ Whether ‘cause’ for removal exists in any given situation will depend, at least in part, on the seriousness of the alleged misconduct, and the extent of any nexus that may exist to the Governor’s professional duties. The key issue is whether ‘[t]he cause assigned’ truly ‘impl[ies] an unfitness for the place’—or whether it simply represents an effort to secure a ‘more congenial’ replacement. Without such constraints in place, any perceived or alleged misstep (past or present) could provide a ready pretext for a Governor’s removal—a fact that he would surely know, and that would surely weigh on him as he decided what to say and how to vote. Nothing could be more corrosive to the independence that Congress sought to preserve.”^[i]

In other words, no president can invent reasons to fire a Fed governor, not least because even the threat of termination over monetary policy decisions would influence their decisions and undermine the Fed’s statutory independence. Fed folk can keep doing their job without fear of arbitrary pink slips. Even if that means voting 1 – 11 against a rate cut proposal from their leader!

Not that this will be an issue any time soon, because Warsh seems to have completed the secret ritual of new Fed head-dom in record time: swallowing Martin’s Little Pill. Named for former Fed head William McChesney Martin (who claimed jokingly that he took it), it is a little pill you take when you become Fed head that makes you forget everything you ever knew … and act differently than your training suggested, speeches implied or anyone (including you) ever thought you would. Martin blamed this for his failures to tame inflation. So did his successor, Arthur Burns.

Now Warsh has officially joined that secret society. For years, he argued rates were too high. While on Trump’s shortlist, he argued frequently AI would enhance growth and productivity, much like the Internet did, enabling the economy to grow quickly without inflation even if rates are low. There is a slight nod to this in his first policy statement, with the observation “productivity growth and capital investment are strong.”^[ii] One of the five Fed reform task forces he is forming will focus on the Fed’s inflation framework, including what they assess as leading indicators and inputs. And yet … rates held steady, and the statement made no allusions to supporting economic growth. Just a tough stance on inflation.

We know better than to read into this. Maybe he was just trying to make a splash, placate the naysayers and bury the sock-puppet meme before cutting rates later this year. You never know! But markets no longer expect this. In May, fed-funds futures markets showed traders saw a slight possibility of one 2026 rate hike and zero chance of two. Now, both outcomes have about a 40% probability. Expectations leapt. And whether these expectations prove right or wrong, it tells you the marketplace suddenly sees the Kevin Warsh Fed as very independent indeed.

This doesn’t surprise us. We always found it self-evident that the independence kerfuffle was a tempest in a teapot. Warsh was always likely to take Martin’s Little Pill, and all Fed heads are political creatures—all want to get reappointed, and all are concerned with public perception. They have to testify to Congress, for goodness sake! And Warsh’s reappointment would be under whoever wins the 2028 presidential election—not Trump. Now we have a shiny new Supreme Court decision upholding the institutional checks and balances that already existed, so everything can proceed as it would have historically.

Fed independence wasn’t the biggest brick in the wall of worry, but it was there. As investors move past it, their relief—however subconscious—fosters a little more risk taking, helping markets keep on climbing.