These are surreal times, and what could be more surreal than the chairman of the Federal Reserve, Jerome H. Powell, posting a viral video clip about being served with grand jury subpoenas by the Justice Department? Powell (along with everyone else) sees it in simple terms: The president of the United States appears to be trying to punish the Fed for not doing what he wants (although President Donald Trump claimed not to have knowledge of the investigation). And political dominance, which is shorthand for the ways in which politicians may attempt to pressure the Fed, is unquestionably bad.
As if this time isn’t challenging enough, there’s another ongoing effort, a more subterranean one, targeting the Fed’s independence. Some argue that what’s called financial dominance — power that Wall Street exerts over the Fed — is also highly pernicious. “In the U.S., financial dominance has been the bigger problem, and it’s much less noticed and discussed,” said Lev Menand, a law professor at Columbia University. “When you get Fed policy that is suboptimal for the public interest because these other interests are dominating, that’s really bad. Really, really bad.”
While political dominance is obvious, financial dominance is also a more nebulous issue. The Fed has always denied that it has any interest in propping up Wall Street and the markets. “It is a fundamental misreading of monetary policy to believe that the stock market per se is an objective of policy,”the Richmond Fed saidin a 2023 policy brief. In the fall, when asked whether the Fed contributed to asset price increases, Powell said bluntly, “We don’t set asset prices. Markets do that.” As a question of intent, this is almost certainly true. But that’s not how it appears, and the unintended consequences have been pervasive and large. Therein lies a conundrum.
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The simple fact, of course, is that the Fed has come to the rescue of the markets repeatedly. After the stock market crashed in 1987, then-Chairman Alan Greenspan issued a statement affirming the Fed’s “readiness to serve as a source of liquidity to support the economic and financial system.” When the big hedge fund Long-Term Capital Management cratered, the Fed coordinated a private rescue. In the early 2000s, as the dot-com bubble imploded, a recession ensued, and the Fed slashed rates aggressively.
Whatever the rationale, whether it’s to save the system or help the economy, cutting interest rates also helps asset prices increase. The combined weight of all those actions helped create a perception that the Fed provides a “put” — a tool that protects investors from downside risk. In January 2001, the Financial Times even declared, “It’s official: there is a Greenspan put option.”
Over recent decades, the Fed also has became increasingly enmeshed in the plumbing of the financial system, which has led it to support parts of Wall Street that are not supposed to have government support. In the wake of World War II, the 1951 Treasury-Fed Accord freed the Fed from having to subordinate interest rate decisions to the government. It was a key moment in the Fed’s march to putative independence.
But Menand points out that at that same time, the Fed agreed to ensure “orderly markets” for government debt. To accomplish that, it needed Wall Street, and, so, the Fed established a network of firms that would help sell Treasurys; in turn, it offered them short-term financing. That was the start of what people now refer to as the shadow banking system — the network of financial firms that make up some of the essential plumbing of our markets but aren’t officially supervised by the Fed.
The 2008 financial crisis is often described as a bailout of the big banks, and that it was, but Menand argues in his book “The Fed Unbound: Central Banking in a Time of Crisis” that it was also a bailout of the entire shadow banking system, from money market funds to overseas financial institutions.
The Fed took the actions it did to save the entire economy, which benefited everyone. But the aftermath of the financial crisis also showed that the rewards of the Fed’s actions are disproportionate, because the bailout benefited Wall Street most of all. “The Fed’s intervention revived finance, ratified its disproportionate place in the U.S. economy, and restored the concentration of wealth and income among the richest,” wrote a group of economists in a 2018 paper.
In the aftermath of that crisis, the Fed embarked on the policy known as quantitative easing, or QE, which means the large-scale purchases of Treasurys and mortgage-backed bonds. Again, the Fed’s goal was to support the economy and benefit everyone — but along with spurring the economy by reducing interest rates further, QE is supposed to work by causing a “wealth effect,” meaning that asset prices rise, which is supposed to spur spending.
A 2017 study by the Bank for International Settlements found that QE had a minimal impact on the real economy but a huge impact on equity prices. Because the wealthy own most financial assets, the pattern repeated, and the rich got richer. “Successive interventions by the Fed during and after the financial crisis created what amounted to a de facto backstop for asset owners,” Treasury Secretary Scott Bessent wrote in the fall. “This led to a harmful cycle whereby asset owners came to control an ever-larger portion of national wealth.”
Economist Paul Krugman called Bessent’s entire piece “sleazy, vile slander of the Fed.” He argues that with QE, the Fed was simply trying to do its job to help the economy. But many others, including the well-respected analyst Karen Shaw Petrou and economist Ed Yardeni, have made similar criticisms of QE’s side effects. And at the time, the potential for increased speculation caused misgivings within the Fed, even for Powell. At a 2013 Fed meeting, Powell recounted the results of a survey showing that large investors believed that the Fed’s policies were “luring people into investments that may not really make sense.”
Then came the coronavirus pandemic. A big part of the reason for the size and speed with which the Fed moved in that awful spring of 2020 is that it once again had to rescue the shadow banking system, lest the Treasury market fall apart and the United States be unable to finance itself. “The Fed’s interventions in March and April of 2020 were almost 100 percent about the shadow banking system,” Menand said.
By then, the response was positively Pavlovian. Asset prices soared. Again, it helped everyone — but, again, it helped the rich most of all. And it reinforced the perception of a Fed put. “The market feels very strongly that it is basically holding the Fed hostage,” saideconomist Mohamed El-Erian in 2020.
“A Fed governor can say all day long that there’s no put,” said Christopher Leonard, author of “The Lords of Easy Money: How the Federal Reserve Broke the American Economy.” “But the problem is that the historical record shows that they step in every time there’s a huge disruption in asset markets. There’s no credibility to the denial.”
In addition to the big moments, there’s evidence that the Fed has supported the market in more subtle ways, too. A 2020 study found that since the mid-1990s, the Fed has indeed tended to lower rates significantly after stock market declines. And the Fed’s support for the shadow banking system is growing, not shrinking. At the end of 2025, Menand points out that the Fed came to a little-noticed decision to make it easier for non-banks to obtain short-term funding directly from the central bank, underscoring how deeply market stability now depends on Fed support for firms that are outside its official purview.
The conundrum is that you can make an argument that the Fed is doing exactly what it should, because asset prices and financial market stability are key to the functioning of our modern economy. Today, the market doesn’t just measure our economic health, but also creates — or destroys — it. Can you imagine how you’d react if your 401(k) plummeted 50 percent? “Knowing the Fed will step in to deal with true financial shocks gives everyone, including investors, the confidence to take risks … which in turn leads to growth,”William Poole, who was then the president of the St. Louis Fed, arguedin 2007. Consider the alternative. If a plunge in the market sent the economy into a deep recession, and tax receipts sputtered, the already ballooning national debt would become even more unmanageable. The Fed might be damned if it does bail out Wall Street and support asset prices, but at this point, we are all certainly damned if it does not.
Yet there’s an uncomfortable amount of ambiguity. What, after all, constitutes a true financial shock? That can lead to the belief that the Fed has acted even when it didn’t have to. And when the Fed’s hand is forced, Wall Street, even the parts of it that aren’t supposed to have government support, and the well-off are going to benefit the most. Both these factors create the appearance of financial domination, and especially with repeated reinforcement, the line between the appearance and the reality gets awfully thin.
It’s hard to see an easy way out, absent a massive reform of the structure of our financial system. Maybe the best the Fed can do is to mitigate this through transparency, and through stressing price stability during periods of semi-economic calm, as Powell is doing. That matters more to many Americans than asset prices do and can help reverse the impression that the Fed helps only Wall Street and the rich. Soon, it will be a problem for the new Fed chair.
If there is a silver lining, it’s that this makes political independence look easy.
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