Who Watches the Fed? The Myth of Independence and the Coming Reckoning - Part 1

There's a strange quirk in modern finance: the most powerful institution in the world - the Federal Reserve - has no real accountability. It controls the price of money, dictates liquidity, inflates and deflates asset bubbles, and can send millions of people into recession with a press conference. Yet if you ask who actually oversees the Fed, the answer is no one. Congress created it, but doesn't control it. The White House influences it, but doesn't own it. Markets depend on it, but can't predict it.

And if the Bank of Japan has taught us anything, it's that a central bank without accountability eventually traps itself, and everyone else, in a game it can't win. Let's dive in.

The Fed Was Built to Be Independent, But Only on Paper

When Congress passed the Federal Reserve Act in 1913, the entire pitch was independence. The central bank needed to be insulated from elections, politics, and emotional decision-making. It was supposed to be a "steady hand" guiding the economy through boom and bust.

But independence has two definitions. Operational independence is the ability to execute policy, while goal independence is the power to decide what the goals even are. The Fed has always had the first; the second has been blurry for a century. When Congress added the dual mandate, maximum employment and stable prices, it effectively created a Rorschach test. Politicians could pressure the Fed in any direction and justify it through the mandate. That's the crack where politicization gets in. And it has, repeatedly.

The Myth of Independence: History Is Full of Political Fed Pressure

The Fed likes to pretend it's a neutral referee. History says otherwise.

1. WWII Yield Peg: The Fed Becomes a Financing Arm (1940s): During the war, the Fed was forced to cap long-term Treasury yields to help the government borrow cheaply. Independence evaporated; the Fed became a tool of fiscal policy.
2. Nixon and Arthur Burns (1971): This is the classic example. Nixon needed low rates to get reelected. He pressured Fed Chair Arthur Burns to deliver. Burns delivered. Inflation exploded. This was the birth of the "Fed is captured" narrative - and it never really died.
3. Volcker: Independence Through Political Protection (1980s): Volcker is celebrated for being iron-willed and apolitical. But what people forget is that Reagan gave him political cover. Without the White House behind him, rates never go to 20%. Independence only existed because it was convenient.
4. Greenspan: Markets Became the Master (1990s-2000s): Greenspan wasn't independent; he was tolerated. A rising stock market kept politicians happy. His power grew because it aligned with political incentives.
5. 2008 and 2020: The Fed Becomes the Market: Quantitative easing, MBS purchases, corporate credit facilities, emergency backstops, the Fed moved from referee to the largest player on the field.

When a central bank buys trillions of dollars of assets... when it picks winners and losers... when it backstops entire industries... It is impossible to call it independent. It is just powerful.

The Accountability Vacuum

Here's the uncomfortable truth: Fed officials are not elected, not market-disciplined, and not accountable for their errors. They operate with models that fail constantly, forecasts that miss by miles, no career consequences, zero external oversight, and opaque communication practices.

When they overstimulate, we get asset bubbles. When they overtighten, something breaks. When they forecast wrong, they shrug. And yet, markets hang on every word. Politicians blame them or praise them depending on the weather, and asset prices live and die by their press conferences. This is the definition of an accountability problem.

Come back tomorrow for Part 2 of this topic!