The most Important financial market news this week was not the U.S. Justice Department’s opening an investigation into Fed Chairman Powell over the Fed’s grossly mismanaged building project, but Powell’s hysterically arrogant and entitled response to it, which was joined by other central bank chiefs. The Fed Chairman is not above the law, and the Fed has arrogated to itself an altogether excessive power over our lives. President Trump’s monetary instincts may be foolish, but his belief is correct that the Fed needs taking down a few pegs to ensure our future prosperity.

The Fed’s new $2.5 billion building, which ran far over cost and which may have involved improper contracts (I presume that is what the Justice Department inquiry will check) is symptomatic of the mission creep that over the last few decades has expanded the Fed’s authority far beyond what is authorized by statute. Indeed, in some cases mission creep has allowed the Fed to institutionalize policies that directly contradict its clear instructions from Congress. Naturally, with a bloated mission that under the Biden Administration was to include “climate change” the Fed needs more space for its ever-expanding empire. Bureaucracy expands whether or not there is a need for it. In this context you should note the Deutsche Bundesbank’s 12,500 employees, when it has responsibility neither for monetary policy nor for bank regulation – what do they do all day, beyond bureaucratic infighting?

The Fed’s diversion from the objectives legally imposed on it by the 1978 Humphrey-Hawkins Act is gratuitous and widespread. The Act instructed the Fed to maintain an objective of price stability and indeed mandated an objective of attaining zero inflation by 1988. Nowhere in the Act was the Fed authorized to set a 2% inflation target, which doubles prices every 35 years and by definition is completely incompatible with price stability. If the Fed wishes to set such a damaging target it must return to Congress for authorization to do so, which must be in legislation passed by both the House and the Senate and signed by the President. Since Fed chairman Ben Bernanke arbitrarily set the 2% inflation target in 2012 the Fed has made no attempt to get that target properly authorized, while monetary policy has been bedeviled by its strictures, with a bizarre attempt to lower interest rates to negative real levels in 2018-19 when inflation was still close to 2% and showing signs of acceleration.

The other huge bloat in the Fed’s current responsibilities is its responsibility for bank regulation. This is a huge conflict of interest with its responsibility for monetary policy – a necessary tight monetary policy will generally be disliked by an inflation-happy banking system. That was, for example, demonstrated by Andrew Bailey’s Bank of England in 2022, when it was able to cause a financial crisis against the Liz Truss government it did not like by scarifying markets about the financial state of pension funds, which had been forced into buying overpriced negative-yielding index-linked bonds by the Bank’s own regulators. Central Banks should not be able to cause financial crises against governments they don’t like; their political power is grossly excessive and will almost certainly be exercised against the kind of capitalist growth-promoting populist government that Liz Truss briefly and Donald Trump more permanently represent.

Even the Fed’s pure interest rate responsibilities are operated with too much latitude and have been corrupted by political considerations. Chairman Powell’s 0.50% rate cut in September 2024, when unemployment was artificially low, inflation was still quite high and the Fed had previously telegraphed caution in rate cuts, was very clearly timed so as to boost the Harris/Walz ticket in November’s Presidential election and avoid Powell’s nightmare of another Trump administration.

A less controversial example at this date: the sainted Fed Chairman Paul Volcker, having set out in October 1979 to conquer inflation once and for all, pushed the Federal Funds rate up from an average of 10.94% in August 1979 when he took office to a peak average of 17.61% in April 1980. Then, realizing that his friend and political sponsor President Carter had a difficult election ahead in November 1980, he allowed the average to crash to 9.03% in July 1980, an extraordinarily rapid drop that (I speak from experience) was very difficult to trade. That of course reinflated the economy and rekindled inflation, so Volcker had to tighten again. Although the Federal Funds average rate was still only 12.81% in October 1980, before the election, Volcker pushed it up to 19.08% in January 1981 and kept money very tight for the whole of 1981, so that the average was still 14.78% in February 1982.

These gyrations gave us wild economic swings with a ‘double-dip’ recession of a type we have not suffered before or since in my lifetime and inflation that did not drop back definitively until the summer of 1982, at which point the stock market took off on a bull run that has basically lasted to this day. The double-dip recession of 1979-82 with its wildly fluctuating inflation and teeth-aching interest rates, even real interest rates, was most unpleasant; fine for us bankers, but extremely hard on U.S. industry, much of which went bankrupt and was forced to liquidate – the unemployment rate peaked at 10.8% as late as November 1982, the worst since the Great Depression. Had Volcker not played political games as Fed Chairman before the 1980 election, the tight money would have squeezed out inflation a year earlier, the recession would have been a year shorter and would have resulted in a much lower unemployment peak and far fewer bankruptcies of iconic U.S. companies.

Under a classical Gold Standard, central banks are not really necessary, but if you have one like the 19th Century Bank of England, its job is the purely mechanical one of managing the gold flows in and out of the economy so that the money market remains in equilibrium. If the Bank gets it wrong, as in 1825, the political authorities must step in and sort the system out, as Liverpool did so ably in December of that year. In such a system, banking should ideally be widely dispersed so that financial power is not concentrated to favor the metropolitan and well connected. The English country banking system of 1825 was admirable in that respect, as was the 19th century U.S. banking system. Ideally, a clearing house would ensure that rural bank paper is accepted at close to par throughout the system; the Bank of England and other London clearing banks did that in 1825; in the U.S. that was the principal function of the two Banks of the United States. Another alternative is to have a limited number of nationally chartered note issuing banks, like the U.S. from 1862 to 1913. Further artificial restrictions of the system are unnecessary; Britain’s 1844 Bank Charter Act did more harm than good.

Given that the gold price is now $4,600 per ounce, the world may be about to return to a Gold Standard whether the Keynesian nitwits at Fed, the Bank of England and the European Central Bank like it or not. President Biden may have wrecked the dollar’s reserve currency status by stealing $600 billion of Russian central bank dollar reserves, and no other currency has shown itself fit to replace the dollar. Bitcoin, the private sector alternative, is far too susceptible to fraud, so gold appears to be reasserting its rightful place in the world economy.

Even if a full return to gold does not happen (if it did, the Fed should be abolished) the Fed must be split in two, with bank regulation removed from it altogether, and additional functions such as consumer protection closed down. If necessary, through a lawsuit based on the Humphrey-Hawkins Act, which should have every chance of success, the Fed must be made to set an inflation target of zero and stick to that target, with appropriate financial and other penalties imposed on the Federal Open Market Committee if they miss that target by more than 1%.

With the Fed’s function restricted in that way, it will no longer need its new $2.5 billion headquarters. Indeed, to ensure it does not suffer from either political or financial corruption, that headquarters should be moved away from the centers of political and financial power, perhaps to Kansas City, a suitably unfashionable and unbeautiful venue (Jackson Hole, Wyoming is far too attractive!) that will not attract the “academic scribblers” who corrupt the “madmen in authority” in Keynes’ immortal words.

Even without a Gold Standard, a Kansas City headquartered Fed with a firm zero-inflation mandate and a Chairman nobody has ever heard of will run a far better monetary policy than that the Fed has managed to run since 1913.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)