When Fed Chair Jerome Powell announced Sunday evening he was under criminal investigation from the DOJ this week, the markets braced for a shock. The probe—centered on a $2.6 billion renovation of the Fed’s Washington headquarters—was immediately branded by an unusually direct Powell as a “pretext” to force interest rate cuts. Futures went down.
Yet, Monday came, and while gold and silver went vertical, equities stayed calm and the dollar barely drifted. To economist Tyler Cowen, the renowned libertarian from George Mason University and author of the influential Marginal Revolution blog, this lack of market panic is the most revealing part of the drama. It isn’t that investors trust the administration’s motives; it’s that they have already accepted the “ugly little truth” that the Federal Reserve’s independence is a relic of a bygone era.
“What Trump did was terrible,” Cowen said on the technology podcast TBPN, referring to the administration’s erratic, “Captain Queeg” style of institutional pressure. “But to me, the reason markets didn’t react more is because we already wrecked the independence of the Fed. That’s the ugly little truth behind this story. It was already wrecked.”
In Cowen’s telling, the damage was done years ago, through fiscal policy. Budget deals, tax cuts and a chronic deficit have steadily narrowed the Fed’s real freedom to act, regardless of its formal mandate.
