Should the Fed Stop Setting Interest Rates?
The Case for and Against Central Bank Control
Author: Neil Winward I Read Time: 5 minutes
Across policy circles, trading floors, and social media, one debate is gaining momentum:
Should the Federal Reserve continue setting U.S. interest rates — or should we let the market decide?
This isn’t just an academic question. It’s about who holds the steering wheel of the U.S. economy and whether we still trust them to drive.
A Brief History of the Fed
The Federal Reserve was created by the Federal Reserve Act of 1913, signed into law by President Woodrow Wilson on December 23, 1913.
Woodrow said it best himself: “There has been no question in our time more anxiously debated than this question of banking reform. This measure takes control of our currency out of the hands of a private monopoly and makes it an instrument of the whole people.”
The Fed’s creation meant the United States would have a central authority for monetary policy and banking stability that would serve the public interest, not just private financial institutions.
The Fed’s original mission:
Provide a stable money supply
Act as lender of last resort during crises
Smooth out the boom-and-bust cycles by adjusting interest rates and credit conditions
Over the decades, the Fed’s mandate expanded to include promoting maximum employment, stable prices, and moderate long-term interest rates.
The Pre-Fed US Economy
The U.S. before 1913 had no central bank. Interest rates and credit were set entirely by private banks and market forces. That often worked fine during good times but in bad times it was catastrophic. Rates would spike, credit would dry up, and economic downturns would deepen.
The Panic of 1907 was the breaking point:
Triggered by a failed attempt to corner the copper market
Stock markets collapsed, depositors rushed to withdraw cash, and many banks and trust companies failed
The U.S. economy spiraled toward depression
J.P. Morgan personally organized a rescue by rallying major banks to inject liquidity but the crisis showed the danger of relying on one man’s influence instead of a formal institution.
This led Congress to create the National Monetary Commission in 1908, which studied central banking systems abroad and drafted the blueprint that became the Federal Reserve Act.
The Value the Fed Brings
Proponents argue the Fed is the economy’s shock absorber. By raising rates when inflation rises, and cutting them when growth stalls, it can reduce the severity of recessions and keep prices stable.
It also plays a critical role as lender of last resort: injecting liquidity when markets freeze, as in 2008 and 2020. Without that backstop, many believe financial crises would be deeper and longer.
Notable Accomplishments Credited to the Fed
While controversial, the Fed has played critical roles in stabilizing the economy during crises:
The Great Depression (1930s): Eventually implemented policies to expand the money supply, though economists debate if this came too late
World War II: Managed interest rates to keep government borrowing costs low, enabling massive war financing
1980s Inflation Fight: Under Paul Volcker, the Fed hiked rates aggressively to bring down double-digit inflation, paving the way for decades of lower inflation
2008 Financial Crisis: Provided emergency lending facilities and slashed rates to near zero, helping prevent a complete financial collapse
COVID-19 Pandemic (2020): Acted quickly to stabilize markets, slash rates, and launch large-scale asset purchases to avoid a deep economic depression
Attempts to Close the Fed
Over the years, various politicians — particularly populists and some libertarians — have called for the Fed’s powers to be curtailed or for it to be abolished outright.
Notable examples:
Ron Paul and the “Audit the Fed” and “End the Fed” campaigns in the 2000s–2010s
Some criticism during President Trump’s term, where he publicly attacked Fed rate decisions, though he did not move to dismantle it
These efforts have never gained enough congressional support to seriously threaten the Fed’s existence.
The Case for Market-Set Interest Rates
Some economists and investors argue that central banks distort the natural supply and demand for capital. Their main points:
True Price Discovery: Letting the market set rates would ensure borrowing costs reflect real-time economic conditions.
No Moral Hazard: Without the Fed “bailing out” markets, risk would be priced more accurately.
Greater Transparency: Rates wouldn’t be influenced by closed-door meetings or policy speeches.
Fiscal Discipline: Governments would face real borrowing costs, potentially reducing deficits.
The Case Against Removing the Fed’s Role
Critics of a purely market-driven approach point out serious risks:
Loss of Stabilization Tools: Without the Fed adjusting rates, there’s no lever to combat inflation or recessions.
Volatility: Markets can overshoot — pushing rates too high or too low, amplifying economic swings.
Liquidity Crises: In times of panic, rates could spike uncontrollably without a lender of last resort.
History’s Warning: The pre-Fed era saw frequent, devastating financial panics that destabilized the economy.
Top Supporters of the Fed
Jerome Powell, Federal Reserve Chair — Continues championing the Fed’s independence and long-term credibility. Amid political attacks, financial leaders like JPMorgan’s Jamie Dimon have echoed this defense of institutional autonomy. Business Insider
Moderate and centrist economists, such as Mohamed El‑Erian and Jeremy Siegel, are quietly urging Powell to resign—not as a criticism of his performance, but as a strategic move to protect the Fed’s independence under mounting political stress.
Prominent Critics and Opponents
Former Governor Kevin Warsh — Delivered strong criticism in April 2025, arguing the Fed has strayed beyond its mandate, misusing tools like forward guidance and drawing caution and concern from policy hawks. Reuters+Barron's
Stephen Miran — Recently nominated by President Trump to the Fed’s Board of Governors, Miran is aligned with Trump’s call for aggressive rate cuts and structural reform, including reducing Fed independence. Financial Times
Donald Trump and MAGA-aligned figures — Increasingly vocal critics of Powell and the institutional Fed, Trump has attacked the chair personally and signaled eagerness to restructure or replace the institution. Aljazeera.com+MarketWatch
Libertarians and Gold-Standard Advocates — Figures like Ron Paul, Rand Paul, and economist Mark Spitznagel continue to denounce the Fed, calling for its abolition or return to the gold standard, echoing long-standing skepticism.
The Trade-Off
At its core, the debate comes down to a choice:
Pro-Fed: Stability (Centralized Fed Control)
Centralized control by the Federal Reserve allows it to act as a lender of last resort in crises, inject liquidity to prevent bank runs, and use interest rate adjustments to smooth out the boom-bust cycle. By anchoring inflation expectations and keeping borrowing costs relatively predictable, the Fed provides businesses, households, and governments with a stable environment for long-term planning. Its ability to coordinate with other central banks during global shocks and its dual mandate to promote stable prices and maximum employment make it a powerful tool for dampening financial turmoil and sustaining economic confidence.
Anti-Fed: Freedom (Market-Set Rates)
With market-set rates, borrowing costs are determined purely by supply and demand for capital, credit risk, and inflation expectations — not central bank policy. Large government deficits push investors to demand higher interest rates, increasing debt costs. This acts as a natural brake on overspending, forcing fiscal discipline through spending cuts, tax adjustments, or structural reforms. Investors, not central bankers, act as the real-time “enforcers” of sound fiscal policy. But, without the Fed cutting rates or injecting liquidity, recessions could be deeper and longer, credit harder to get, and unemployment slower to recover.
Who Wins and Who Loses in Each System?
Where Do You Stand?
This is not a theoretical exercise. In a world of high debt, shifting global power, and rapid information flows, how we set interest rates could shape the next century of U.S. economic history.
Let’s end with a thought for you to contemplate: Should the Fed step back and let markets set interest rates — or is their guiding hand still essential?
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