Doc's note: The Federal Reserve was established to serve as an independent guardian of the U.S. financial system, free from the political pressures that often drive short-term decision-making.
But as Stansberry Research's Director of Research Matt Weinschenk explains in this essay – taken from the July 2 issue of This Week on Wall Street – President Donald Trump is blurring the lines between the central bank and politics. And while that could have serious implications in the long term, you could make a lot of money in the short term...
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On Monday, June 30, President Donald Trump sent a handwritten note to Federal Reserve Chair Jerome Powell.
On top of a table of global central bank interest rates, he wrote, "Jerome – You are, as usual, 'too late.'"
He complained that "hundreds of billions of dollars" are being lost due to Fed policy. And then he bracketed the countries with the lowest rates, from Switzerland (at 0.25%) to Thailand (at 1.75%), and scribbled that the U.S. interest rate "should be here"...
Lest you were worried about inflation, Trump also helpfully signed off his note with the words, "No inflation."
Now, this isn't a new development. Trump wants lower interest rates. And he's not afraid to say it.
He has requested Powell cut rates many times over the past few months... and, at various points, has either threatened to fire him or encouraged him to step down.
But all this violates the long-standing norm of an independent Federal Reserve...
As I'll explain, while that's worrisome for the long term, it can be rocket fuel for stocks over the next year.
See, the Fed has a lot of power. In direct terms, it controls the benchmark interest rate (the federal-funds rate) and bank regulations. But in a broader sense, that gives it power over credit creation, the money supply, and the value of our currency.
When the Fed was established in 1913, Americans were extremely skeptical of centralized control of the financial system.
After all, throughout history, governments have proved themselves inclined to excessive money-printing and overspending.
It's the way political incentives work. Politicians win votes by making promises and spending money. Having a strong economy also keeps the current party or president in power.
So every politician – if left to their own impulses – would want lower interest rates come election time. They boost the economy and make it easier to borrow and spend.
However, the cost of low rates today is inflation and a weakening currency tomorrow.
That said, while inflation eats away at your savings, it also makes it easier to pay off government debts – something else that every president wants to tackle.
The Fed was set up to be independent so that it wouldn't succumb to the pressure of appeasing voters.
Fed board members serve 14-year terms specifically to insulate them from politics. Fed chairs serve for four years and are appointed by the president. But their terms are intentionally staggered so they don't align with presidential terms.
Moreover, the president can't remove any of these members, unless it's "for cause."
Again, every president wants a strong economy... either to boost their own chances of reelection or the prospects of their party. So every president wants low rates.
This was obvious as far back as 1913, when the Fed was created.
All governments make spending decisions and want to stay in power. In pursuit of those goals, they do all kinds of things in their own interest that don't benefit the people.
And if you pair that with the power to control the money supply, it's just too much temptation for any politician. It can very quickly erode confidence in our economy.
The late 1970s – when inflation topped 8% – is a good case study here...
Starting in 1979, Fed Chair Paul Volcker had to crank interest rates as high as 19% to combat inflation. That, of course, plunged the economy into a deep recession. But it did solve the inflation problem...
It wasn't a popular decision. And President Jimmy Carter – who held office during the recession and appointed Volcker – lost his bid for reelection in 1980. But Volcker didn't care much... because he was insulated from political pressure and public opinion.
As you watch the path of the federal deficit these days, it's clear that elected officials aren't willing to do anything the least bit painful in the short term to protect our economy in the long term.
That's why fiscal and monetary decisions must be kept separate. That's why you need an independent Federal Reserve. You don't let a child with a sweet tooth set the family's candy budget. You know precisely what they'll do.
Now, Powell's four-year term as Fed chair is coming to an end...
He'll serve at the helm until next May and will remain on the board of governors until 2028.
Personally, I don't think any pressure from Trump will be enough to change Powell's stance on interest rates. He's a skilled technocrat. And given his prior Wall Street career, he doesn't really need this job paying him $190,000 per year. He seems to realize that history will remember him better for his backbone than his subservience to the president.
But after May, we'll likely have a new Fed chair. At that point, all bets are off for where interest rates are headed.
But the implications for investors are clear...
While a politicized Fed is a threat to our economy in the long term, it's great for stocks in the short term.
The S&P 500 Index rose a half percent on June 30, the day Trump posted his note to Truth Social.
That extends the vigorous run we've seen since June 20... which itself continues the bull market we've seen following the tariff-driven panic...
On the other hand, this also hurts the dollar.
Lower interest rates make the dollar less attractive as an investment. And, in the longer term, a less independent Fed will mean even less confidence in the dollar and the U.S. economy. That feeds the "sell America" trade I've been warning about...
People have all sorts of complaints about the Fed. And I hear them.
But none of those problems are made better by making the Fed less independent. They're made worse.
Trump is going to put pressure on the Fed to lower rates. There's no doubt about that.
If this sets a new precedent for how our monetary system works, it could be a major problem... leading to higher inflation, bigger boom-and-bust cycles, and less trust in the dollar.
All those things are very bad for people living paycheck to paycheck and will lead to more struggles down the road.
However, for investors, lower interest rates drive up asset prices. Those who own stocks and bonds will get even richer. So position yourself accordingly.
Good investing,
Matt Weinschenk
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