PIMCO: Eroding Fed Independence Would Harm Markets

Pacific Investment Management Co. (PIMCO), a bond fund giant managing $2.1 trillion in assets, has warned that any attempt to undermine the independence of the Federal Reserve (also known as the U.S. central bank) would be “extremely detrimental to markets.” This warning comes amid escalating criticism of Fed Chairman Jerome Powell by former U.S. President Donald Trump.

Dan Ivascyn, PIMCO’s chief investment officer, told the Financial Times that “markets value central bank independence, at least when it comes to setting policy rates.” He added: “While there will always be tensions between policymakers, any attempt to erode that independence will be very damaging for markets.”

Ivascyn’s comments came hours after Trump made a rare visit to the Fed’s Washington headquarters, where he reportedly argued with Powell over renovation costs. A U.S. president visiting the Fed is highly unusual, particularly given that the Fed has been authorized to set monetary policy independently since 1951. The Supreme Court has indicated that the White House cannot fire Powell or the other six Fed governors over monetary policy disagreements.

Trump's Criticism of the Fed

Trump has repeatedly and vehemently criticized the Fed and its chairman, expressing dissatisfaction with the Fed’s refusal to cut interest rates this year. On Thursday, Trump reiterated his call for the Fed to lower the benchmark interest rate from the current 4.25%-4.5% range, saying “rates have to come down.”

Last week, Trump sparked concerns about central bank independence when he asked lawmakers “whether he should fire Powell,” triggering a sharp decline in the dollar. Although he later stated that he did not intend to take this action, investors viewed the mere raising of the question as an escalation of concerns about central bank independence.

Trump claimed on Thursday that there was “no tension” between him and Powell, adding that he “didn’t see the need” to fire the Fed chair.

Concerns about Pressure on Powell

Some Fed insiders and former central bank officials are concerned that these attacks are being used by the administration as leverage to force Powell to resign before his term ends in May 2026, or even to fire him for “malfeasance” – a term typically referring to legal wrongdoing.

Powell has firmly stated his intention to stay in office, believing that there is no legal basis for Trump to fire him.

Ivascyn concluded: “The idea that Powell needs to resign to preserve independence just doesn’t make sense to us. We think a good, independent Fed chair should finish their term before deciding what to do next.” He added: “From a bond market perspective, it’s critical to continue to see positive signals that he will be able to complete his term.”

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The Importance of Central Bank Independence

Central bank independence is a crucial element in maintaining economic stability. This independence allows the central bank to make monetary policy decisions based on economic data and objective analysis, without being subject to short-term political pressures. When a central bank is independent, it can focus on achieving long-term goals such as price stability and full employment, leading to sustainable economic growth.