A Utah man shaped an independent Federal Reserve. This BYU expert explains why it matters

Debate about the political independence of the Federal Reserve, highlighted over the past year in large part by President Donald Trump’s haranguing of the U.S. central bank over interest rate policy, continued this week after the president named Kevin Warsh as his choice to succeed current Fed chairman Jerome Powell.

Warsh, 55, is a Harvard-educated lawyer and former banking executive with an observable track record on monetary policy thanks to his previous stint as a Fed governor from 2006 to 2011. Relative support for the nominee, who is subject to a series of U.S. Senate approval votes beginning with the body’s Banking Committee, has fallen along partisan lines.

Senate Banking Committee Chairman Tim Scott, R-S.C, said in a statement that Warsh “has deep knowledge of markets and monetary policy that will be essential in this role.” The committee’s ranking Democrat, Sen. Elizabeth Warren of Massachusetts, suggested Warsh had passed Trump’s loyalty test, saying “This nomination is the latest step in Trump’s attempt to seize control of the Fed.”

Since the start of his second term, Trump and his allies have repeatedly clashed with the Fed’s leadership over interest rate issues, publicly criticizing Powell for not cutting rates quickly enough and even suggesting that the president should have more say in monetary decisions — a stance that would erode the traditional insulation of the Federal Reserve from political influence.

Tensions further escalated following the administration’s pursuit of legal efforts to remove a sitting Fed governor and initiating a federal investigation into Powell — moves that many observers see as attempts to assert greater White House control over the central bank.

Today’s debate over the design and purpose of the Federal Reserve mirrors, in many ways, challenges that arose amid conditions wrought by the Great Depression, namely, can the Fed act in the long-term economic interest of the nation if its decisions are subject to political pressure?

That was certainly on the mind of Marriner Eccles as he assumed the helm of the Fed in 1934, a time that found the U.S. central bank in a sorry state of fragmentation and weakened by its undue deference to the U.S. Treasury Department.

Eccles, a successful businessman and Republican, was considered an unlikely choice by Democratic President Franklin D. Roosevelt to head the U.S. central bank, but the Utah banker would go on to fundamentally remake the Fed and help solidify its political independence.

Eccles’ vision of a central bank that was close enough to government to understand national priorities yet independent enough to say “no” in the face of harmful monetary policy is a balance that continues to exist while being at the heart of the current turbulence.

In a Deseret News interview, BYU Marriott School of Business professor and former Federal Reserve economist Jason Kotter explained why keeping politics out of monetary policy is crucial for the country’s economic stability and how important a role Eccles played in establishing the central bank’s independence.

Editor’s note: This interview has been edited for length and clarity.

Deseret News: Why do economists place so much importance on the Federal Reserve’s independence from the executive branch?

Jason Kotter: Economists are pretty much unified on this point: independence of the central bank is crucial to a country’s economic well-being. From the very beginning, the Federal Reserve Act was written specifically to keep the Fed insulated from direct political control.

The reason is straightforward. The Fed has two primary goals — maintaining stable prices and keeping employment as high as possible — and essentially one main tool: interest rates. Political leaders, regardless of party, face extremely strong incentives to push for lower interest rates because that creates short-term economic growth, faster job creation and political rewards. The downside of interest rates being too low — higher inflation — usually shows up later, often after the next election.

DN: Why is inflation such a delayed but serious risk?

JK: If interest rates are kept lower than economic conditions justify, the economy can grow too quickly and overheat. Prices rise, and in extreme cases you get sustained inflation. The costs are real, but they’re delayed. A politician can enjoy the benefits quickly, while the consequences show up years later. That makes it very hard to resist the temptation to prioritize short-term gains over long-term stability.

This concern is exactly why Congress originally structured the Fed to be independent of the administration.

DN: Is there a comparison that helps people understand this independence?

JK: A good analogy is the Supreme Court. Justices serve lifetime terms because we want the judiciary insulated from political winds. We intuitively recognize that society is better off when courts aren’t changing direction every time power changes hands.

The Federal Reserve operates on the same principle. It’s part of government, but it’s isolated from political pressure so it can make decisions that may be unpopular in the short run but healthier for the economy over time. That’s also why Fed governors serve 14-year terms —long enough to span multiple administrations.

DN: What happens financially if presidents control monetary policy?

JK: You erode trust immediately. If I’m a bond trader and I see a president pushing aggressively for lower interest rates, I become skeptical. Ironically, that skepticism can raise long-term borrowing costs for the government, not lower them.

The Fed directly controls only short-term, overnight rates. Long-term rates depend heavily on expectations and trust. Political interference can actually push long-term Treasury rates higher, which is the opposite of what politicians want.

More broadly, investors depend on stable and predictable interest rates to evaluate investments — stocks, bonds, business expansions. Even when investors disagree with the Fed, they trust that decisions are data-driven and systematic. That trust disappears when monetary policy becomes political.

DN: How does this play out internationally?

JK: Around the world, countries where the executive branch controls the central bank almost always experience volatile prices and weaker economic growth. Investors flee uncertainty, and that pain is felt by everyone — higher prices, slower growth, fewer opportunities.

Loss of central bank independence creates uncertainty, which leads to slower growth and higher inflation. We’ve seen this pattern repeatedly.

DN: Critics often say the Fed isn’t accountable. Is that true?

JK: Not really. The Fed chair reports directly to Congress every six months. The Fed publishes its balance sheet every single week — far more frequently than most public companies. It also releases a fully audited financial statement annually. Transparency is actually quite high, probably higher than most people realize.

DN: What about alternatives like rule-based or algorithmic monetary policy?

JK: Some economists argue interest rates should be set by a formula or algorithm. That would remove concerns about discretion or bad motives, and there are some appealing features to that idea.

The problem is that it’s extremely hard to design an algorithm that handles unforeseen shocks — COVID being the obvious example. That’s the strongest argument for discretionary authority. It’s not unreasonable to want clearer rules, but total automation is unlikely to work in every situation.

DN: You’ve worked at the Fed yourself. How do you view it personally?

JK: I teach money and banking, and I’m a former Fed employee. There are economists who believe we’d be better off without a central bank at all. I don’t agree, but what’s interesting is that even many of those critics agree that if we’re going to have a central bank, independence is better than executive control.

That’s telling. The real debate right now isn’t whether the Fed should exist — it’s whether the administration should control it. On that question, the case for independence is very strong.

DN: Why is the Fed such a hard institution for the public to relate to?

JK: If the Fed is doing its job well, most people never think about it. That makes it hard to appreciate its importance. At the same time, managing the economy requires interest rate decisions that often feel personally painful — higher mortgage rates, higher credit card rates.

What’s hard for people is separating short-term personal costs from the long-term damage of an economy that runs out of control. But once you realize how much of daily life depends on borrowing — homes, cars, education — it becomes clear that Fed decisions affect almost every family.

DN: Some people see the Fed as a powerful, profit-driven institution. How accurate is that?

JK: The Fed isn’t funded by taxpayers. It funds itself through bank fees and its portfolio, and it sends its earnings back to the Treasury. It doesn’t operate like a profit-seeking bank, and Fed officials aren’t compensated based on financial performance.

The Fed’s only real mission is economic stability. They’re not perfect, but they’ve done a pretty good job overall. Nobody likes high interest rates — but you also don’t like $12 eggs. Stability benefits everyone.

DN: Is the Fed a political institution now?

JK: I don’t view this as a political issue — it shouldn’t be. Threats to the Fed have come from both parties. An independent central bank should be a nonpartisan value.

Everything feels political today, which makes these conversations harder, but the economic logic hasn’t changed.

DN: You often teach about Marriner Eccles. Why does he matter?

JK: Marriner Eccles is one of my favorite figures to teach. He was a very conservative, highly successful Utah businessman — not the kind of person you’d expect Franklin D. Roosevelt to appoint. Yet FDR brought him in to lead the Fed.

What’s remarkable is that Eccles centralized power within the Fed, strengthening federal authority over the system. You’d expect a conservative banker to favor decentralization, but he believed independence and coordination were essential.

Under Eccles, the Federal Open Market Committee operated with near-unanimity. His influence shaped the modern Fed in ways we still see today.

DN: What do you admire most about Eccles — and modern Fed leaders?

JK: Eccles tells this story from the Great Depression: his banks were doing fine while people suffered around him. He started asking himself what his work was really for and made a conscious decision to serve something bigger than himself.

I see that same mindset in people like (Fed chair) Jay Powell. Many Fed leaders were extremely successful in the private sector and chose public service instead. When I worked at the Fed, that’s how it felt — that we were contributing to something larger, even if imperfectly.

That sense of mission is what gives me hope in the institution. Talented people using their skills to improve the economy — that’s worth protecting.