Former Fed Chair sends stern message on economy, Fed

For generations, the Federal Reserve Board has functioned pretty darn well as an independent central bank free of the nasty games and dirty stains of political pressure from the White House.

At least one former Federal Reserve Chair wants to keep it this way.

This ensures that Americans and our families will experience a solid economy based on data-driven, not ego-driven, monetary policy.

Former Fed Chair Janet Yellen is a former Treasury Secretary, former head of the White House Council of Economic Advisors, and current professor emeritus at the University of California at Berkeley. (Yes, shes broken many glass ceilings along the way.)

Her successor at the Fed? Jerome Powell, the current Fed chair.

And with all the angst and anxiety that the White House has been spewing at Powell over interest rate cuts in the last six months, Yellen is not – publicly at least – lending her voice to that critical chorus.

In fact, she offered a very stern warning on July 22 about the economic impact of a current or new Federal Reserve Chair who bends the knee to President Donald Trumps increasingly vocal and vitriolic rhetoric for immediate and drastic interest rate cuts.

What the Feds dual mandate requires

The Federal Reserve Board has one job: complying with the dual congressional mandate to maintain 2% inflation and keeping unemployment rates stable with steady GDP growth. It uses interest rates as a tool to manage that delicate balance.

The Federal Open Meeting Committee (FOMC) is the Feds 12-member policymaking panel headed by Powell.

The FOMC has been holding the Federal Funds Rate steady at 4.25% to 4.50% since December 2024 in anticipation of inflation from Trumps tariffs and trade wars.

The Federal Reserve's Fed Funds Rate is the price the Fed charges U.S. banks to borrow money overnight. This rate sets the pace for short-term borrowing costs like credit cards, auto loans, and student loans.

The 10-year Treasury Bond yield is the benchmark for longer-term interest rates like the 30-year fixed mortgage, currently hovering around 6.8%. The market expectations for how the Fed will set rates in the future influences long-term rates.

The president is demanding a hefty Federal Funds Rate slash of 3%, saying it will benefit Americans looking to buy homes with lower mortgages and reduce interest on the trillions of dollars in the U.S. deficit.

The tariffs, announced on Liberation Day‘’ in April, now face a final Aug. 1 deadline. They are the highest in 90 years, ranging from 10% to 50% on imported goods and services.

Yellen warns of dire consequences of drastic rate cuts

There have been episodes in the past that we know about now where U.S. presidents have attempted to pressure the chairs of the Federal Reserve, Yellin said in a CNBC interview.

She said the most prominent example was Richard Nixon “exhorting” Federal Reserve Chair Arthur Burns to hold interest rates down before the 1972 election.

“And what that ushered in the United States was a period of stagflation, weak growth high unemployment, high inflation. And it really took Paul Volcker to come in and it cost us a very deep recession to anchor inflationary expectations, to get them down,‘’ Yellen said, adding that such ”consequences are very poor for the economy.

More Fed:

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• Fed official revamps interest-rate cut forecast for this year

In addition, Yellen said the politicization of the central U.S. bank “undermines the global role of the dollar and the willingness of foreigners to invest in the United States.”

Heres what Yellen says is crucial for a healthy American economy:

“Whats really important, though, is when an individual is…a Fed chair, that they have the capacity and willingness to make fact-based judgments and to pursue goals that are congressionally mandated, namely price stability and maximum employment. That becomes their job.”

She cited the current state of the economy as positive, with inflation coming down “close to the Feds 2% goal, the labor market remaining strong at 4.1%.”

Yellin said she was vehemently opposed to the concept of a “shadow” Fed Chair, a notion that the Trump team has been floating to backstop Powell before his term as chair ends in May.

“I think this is one of the dangers President Trump is doing, insisting that he will only put in place a Fed chair who believes in lowering rates,‘’ she said, adding it ”impairs“ the credibility of Powell‘s successor with the markets and ”creates a problem for them, right from the outset, where people will expect they’re political.

The next FOMC meeting is July 29-30, and the panel is expected to hold rates steady. Some Fed watchers are looking at the September FOMC meeting for the next rate cut, pending the outcome of tariff inflation and the unemployment rate.