Tall Paul

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  By Guest Blogger Doug Rowat

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Ages ago, I had a friend take me to an event in Toronto featuring legendary Federal Reserve Chair Paul Volcker.

The problem was that, at the time, I’d never heard of Volcker, let alone the Federal Reserve. Finance wise, I was what you’d call green.

Decades later, of course, it became evident to me, as it had to the entire investing world for over a hundred years, that the most important single financial institution in the world was (and is) the US Federal Reserve.

After a series of banking and financial crises in the early 1900s, the Fed was created in 1913 to stabilize the US financial system. And over the decades, the Fed has steered the US through 20 recessions with 16 different chairs taking the helm, including Volcker from 1979 to 1987. The Fed hasn’t been a perfect institution, and it doesn’t always make the correct interest-rate policy decisions (or the timeliest ones), but overall, it generally gets things right. And since its creation it’s guided the US through more than a century of unrivalled economic expansion.

The chart below shows the expansionary and recessionary periods in the US since 1855. Blue indicates expansion. The Fed’s been in place for the roughly two-thirds of the chart to the right. In other words, there’s been heck of a lot more blue since the Fed was created:

US expansionary (blue) and recessionary (pink) periods since 1855

Source: Federal Reserve Bank of St. Louis. Click to enlarge.

So, the Federal Reserve’s an institution that works. And its prudent oversight has certainly been evident in more recent decades. Where would we be without the Fed intervening and providing stimulus and liquidity during the 2008 financial crisis? Or sharply cutting interest rates during Covid? Or, more recently, doing the exact opposite and sharply raising interest rates during the 2022 inflation crisis? US inflation peaked at 9.1% during this time but never actually hit double digits. Is there anyone who thinks that this crisis would have been averted faster if the US government had interfered to, say, LOWER interest rates instead?

Now we have a US president who’s demanding just that, seeking a benchmark rate of 1%. He’s also threatened to fire previous Fed Chair Jerome Powell (whom he appointed), launched criminal investigations of Powell, attempted to fire (unsuccessfully, so far) Fed governor and FOMC voting member Lisa Cook, and appointed supporter Kevin Warsh as the new chair. It remains to be seen if Warsh, in addition to being a supporter, will also end up being a loyalist, but no doubt he will face pressure similar to Powell if he doesn’t do the president’s bidding.

There’s great danger in a central bank losing its independence. Countries that lose central bank independence inevitably suffer economic consequences including currency depreciation, loss of investor confidence and, most notably, inflation. Look no further than Turkey, Argentina, Venezuela or Zimbabwe as examples:

• Turkey’s current annual inflation rate is 32
•  Argentina’s 34%
• Venezuela’s 350%. (Not an error.)
• And Zimbabwe recently moved to an asset-backed currency to mask its runaway inflation, but the fact that its paper currency used to be WEIGHED rather than counted says all you need to know about that country’s economy.

What I ultimately learned from the Volcker event was that he was formidable (figuratively and literally a giant—he was 6’ 7”), handling his own early-80s inflation crisis in his own way—chomping down on his trademark cigar and ignoring outside criticism and influence. In short, Volcker was an independent thinker heading up a critically important independent institution.

But right now, there’s one guy who wants to change all of this.

Let’s hope, for all our sakes, that he’s unsuccessful.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/07/18/tall-paul/