The biggest threat to the Federal Reserve’s independence is not Trump, but a divided Congress.

Stephen Miran, the new Federal Reserve governor recently appointed by President Trump, has diverged from the mainstream stance of the Fed. Despite several officials acknowledging the continued risk of price pressures, Miran advocates reducing the inflation-adjusted real interest rate to near zero by the end of this year.

On September 17, the Federal Open Market Committee (FOMC) cut the benchmark interest rate by 25 basis points, but Miran voted against it, arguing for a 50-basis-point reduction. He also suggested calling for another 1.25 percentage point cut by 2025, which would bring the federal funds rate range down to 2.75% to 3%. According to the median forecast, Fed officials expect inflation to rise by 2.6% next year, with most believing the risks are tilted to the upside.

Miran claims to maintain independence. However, he has not relinquished his position as Chairman of the White House Council of Economic Advisers and is currently serving as a Fed governor on leave (a term that will end in January next year). In an article, he stated that the entire Federal Reserve system should be more closely aligned with political will.

Indeed, Trump can influence interest rate policies through appointments. He is attempting to remove Fed Governor Lisa Cook over mortgage disclosure issues. Fed Chair Powell’s term as chairman will end in May next year, and if Powell resigns before his term as governor ends, Trump will have another appointment opportunity.

Whether accepted or not, Miran has cast a political shadow over the Federal Reserve. Will this become a “turning point” for the Fed’s independence?

In fact, the risk to the Fed’s independence does not come from Miran or a new chairperson but from the U.S. Congress—particularly the Senate, which is responsible for approving Fed personnel nominations. The question investors now face is: How much control over the Fed is the Senate willing to cede to the president?

The Federal Reserve derives its authority from Congress, and its mission to “stabilize prices and achieve full employment” is legally established based on democratic consensus.

The Federal Reserve must report to Congress rather than being accountable to the president. It must convince lawmakers of its ability to achieve its mandated goals and assure the public that it knows how to balance conflicting objectives while acting as a fair arbiter of financial safety.

Achieving these tasks is no easy feat. For the Fed, explaining how it mitigates larger risks (such as inflation) that could affect households without providing support to markets and financial institutions has always been challenging. Recall that American households were hit by a surge in inflation in 2022.

For now, the Federal Reserve still retains a high level of credibility. Even as its independence faces threats, market expectations for long-term inflation remain close to the 2% target.

However, the ‘democratic mandate framework’ granted by Congress has shown signs of fragility. Congressional oversight of the Federal Reserve is weak, and at times, the Fed itself has been unresponsive to such oversight.

Katie Warbinton, spokesperson for Republican Senator Cynthia Lummis of Wyoming, stated: “We have numerous inquiries that remain unanswered. The Federal Reserve would be wise to remember that it is accountable to the American people it serves.”

Democrats on the Senate Banking Committee noted that at least eight oversight letters sent to the Federal Reserve earlier this year have yet to receive a response.

In Washington, power vacuums are quickly filled. The executive branch is assuming the role of de facto overseer—Treasury Secretary Scott Bessent, for instance, criticized the Fed for ‘mission overreach.’ Legislators could have easily said, ‘This falls under our purview; it’s our responsibility.’ Yet they have remained largely indifferent.

Sarah Binder, a political scientist at the Brookings Institution and co-author of *The Myth of Independence* (which describes the relationship between the Fed and Congress as ‘interdependent’), remarked: ‘The Fed needs supporters, particularly from Congress. When situations worsen and the president launches attacks, they need someone to stand up and defend them.’

In recent years, Congress’s ‘neglect’ of the Federal Reserve has manifested in various ways.

Take, for example, the失控 of inflation by the Federal Reserve between 2021 and 2022: In 2022, the Consumer Price Index (CPI) surged to 9.1%, marking a four-decade high.

Multiple factors contributed to this inflationary spike: supply chain bottlenecks led to shortages of goods, while massive fiscal stimulus totaling approximately $5.1 trillion boosted demand. Both factors were beyond the Federal Reserve’s control. However, by late 2021, inflation signals were already clear—service prices began accelerating, indicating that inflation was not confined to tradable goods alone.

Nevertheless, the Federal Reserve did not begin raising interest rates until March 2022. By then, annualized inflation, measured by the Fed’s preferred gauge, had risen to 7%.

Gauti Eggertsson, an economist at Brown University, and Donald Kohn, former Vice Chairman of the Federal Reserve, argued that part of the blame lies with the “inflationary bias” embedded in the Fed’s new policy framework adopted in 2020, as well as related guidance incorporated into FOMC statements. Such expert analysis could have served as grounds for Congress to conduct a review or establish a non-partisan investigative commission.

However, lawmakers did not choose this path. During the June 2022 monetary policy hearing, Sherrod Brown, then-Chairman of the Senate Banking Committee and Democratic Senator from Ohio, focused his opening remarks on ‘corporate power and concentration’; while Thom Tillis, Republican Senator from North Carolina, attributed inflation to ‘the Fed’s discretionary monetary policy’ and ‘the Biden administration’s stimulus package.’

This was undoubtedly a missed opportunity — Congress could have used it to engage in a deeper dialogue with the Fed regarding its new policy framework.

The Fed will face numerous difficult decisions in the future, and to avoid political backlash, it needs to engage in more dialogue with Congress.

French Hill, Republican Representative from Arkansas and Chairman of the House Financial Services Committee, expressed concerns over Fed oversight and established a working group to study monetary policy.

The working group held a hearing on September 17 to discuss whether the Fed should be assigned a ‘single price stability mandate’; however, unusually, Democrats held a separate roundtable with former Fed Governor Lael Brainard on the same day to discuss the independence of the Federal Reserve.

Political polarization has weakened oversight of the Fed, thereby reducing democratic control over the institution. The White House is taking advantage of the situation, raising questions about whether Congress will defend the institution it created.

The Fed has few tools at its disposal in political gamesmanship, but it can work harder to maintain its credibility by enhancing transparency. At present, it would be most opportune to link each Fed official’s ‘appropriate policy rate expectation’ in the Summary of Economic Projections to their outlooks for unemployment, inflation, and GDP.

Editor/Doris