"Take Over" the Fed: U.S. Treasury Secretary Calls for Comprehensive Review of the Federal Reserve
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"Take Over" the Fed: U.S. Treasury Secretary Calls for Comprehensive Review of the Federal Reserve
Beckworth's op-ed seems to signal an escalation in the Trump administration's criticism of the Fed, moving beyond mere calls for rate cuts to questioning the central bank's overall operating model and the very foundation of its independence as an institution.
Navigating Web3 tides with focused insightsAuthor: Hou Xintong, Yicai
As markets and central banks worldwide express concern and skepticism over the Trump administration's threat to the Federal Reserve's independence, U.S. Treasury Secretary Scott Bessent recently published an op-ed arguing that the Fed's own problems—including policy missteps and mission creep—are what have put its independence at risk, and he called for an independent, comprehensive review of the Federal Reserve.
Bessent traced back to the 2008 financial crisis, noting that many might assume the new tools created after 2008 and the centralization of financial markets would give the Fed deeper insight into the economy’s direction, or at least enable it to steer the economy more effectively. But that has not been the case. In 2009, the Fed projected real GDP growth would accelerate to 4% by 2011. Instead, growth slowed to 1.6%. Over this period, the Fed's two-year forecasts cumulatively overstated real GDP by more than $1 trillion. "Repeated errors suggest the Fed placed too much faith in its own capabilities and in expansionary fiscal policies to stimulate growth. Then, when the Trump administration turned to tax cuts and deregulation, the Fed’s forecasts became overly pessimistic, highlighting its reliance on flawed models and its neglect of supply-side effects," he added. He noted that successive interventions during and after the 2008 crisis provided de facto support to various asset holders, while younger and less wealthy households were excluded from asset appreciation and thus hit hardest by inflation.
Beyond policy errors and worsening inequality, Bessent further wrote that the Fed's "expanding footprint" has profound implications for its independence. By extending its reach into areas traditionally reserved for fiscal authorities, the Fed has blurred the line between monetary and fiscal policy. The Fed’s balance sheet policies directly influence which sectors receive capital, intruding into domains that should belong to markets and elected officials. He said the entanglement between the Fed and Treasury debt management also creates the perception that monetary policy is being used to meet fiscal needs, allowing presidents and Congress to rely on the Fed to bail out the government after poor fiscal decisions.
Moreover, Bessent argued that excessive regulation by the Fed has exacerbated the problem. The Dodd-Frank Act greatly expanded the Fed’s regulatory scope, making it the primary regulator of U.S. finance. Fifteen years later, the results have been disappointing. The 2023 collapse of Silicon Valley Bank illustrated the dangers of combining regulation and monetary policy. The Fed both regulates, lends to, and sets profitability calculations for the banks it oversees—a conflict of interest that is inevitable, blurring accountability and endangering independence. He proposed a more coherent framework to restore professionalism: empowering the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to lead bank supervision, while allowing the Fed to focus on macroprudential oversight, lender-of-last-resort liquidity, and monetary policy.
"The Fed’s expansion beyond its statutory mandate undermines its own credibility and political legitimacy. Excessive use of nonstandard policies, mission creep, and institutional bloat threaten the central bank’s independence," Bessent concluded. "At the core of independence lie credibility and political legitimacy. The Fed’s expansion beyond its proper role has jeopardized both. Large-scale interventions produce serious distributional consequences, erode credibility, and threaten independence. Going forward, the Fed must reduce distortions it imposes on the economy. Unconventional policies like quantitative easing should only be used in genuine emergencies and in coordination with other parts of the federal government. An honest, independent, and nonpartisan review of the entire institution—covering monetary policy, regulation, communication, staffing, and research—must also take place."
Bessent’s op-ed appears to signal an escalation in the Trump administration’s criticism of the Federal Reserve—not merely demanding rate cuts, but now questioning the Fed’s overall operating model and the very foundation of its status as an independent institution. This development confirms earlier market concerns. When the Trump administration abruptly eased pressure on Powell to cut rates and instead focused on the Fed building renovation issue, Patrick Lee, senior economist at Pictet Wealth Management, told Yicai reporters that the administration might use the renovation matter as a pretext to push for greater regulatory and structural reforms of the Fed—creating even more room for maneuver and possibility than simply removing Powell.
Wally Adeyemo, a preferred successor to the Fed chair position under Trump, has previously called for a comprehensive overhaul of the Fed’s operations and suggested drafting a new "Treasury-Fed Accord" to replace the 1951 agreement, which former Fed Chair Paul Volcker called the "charter of central bank independence." "Once changes begin, many mechanisms become open to reform and adjustment—like opening Pandora’s box," Lee said. In this way, it becomes easier for Trump to impose his policy agenda on the Fed.
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