The recent declaration by Boston Fed President Susan Collins that the Federal Reserve is "absolutely" prepared to intervene in financial markets amid Trump-induced market turbulence appears reassuring on the surface. However, this seemingly calming statement masks a fundamental threat to our economic system that deserves critical examination. Rather than providing true stability, such interventions may be perpetuating cycles of risk, moral hazard, and economic distortion that ultimately weaken rather than strengthen our financial foundation.
The Federal Reserve's track record over its century-plus existence reveals a troubling pattern of failure disguised as necessary intervention. Far from achieving its mandate of long-run price stability, the Fed has presided over a dramatic erosion of the U.S. dollar's purchasing power. A consumer basket costing $100 in 1790 would have cost only slightly more ($108) in 1913 when the Fed was created, but by 2008, that same basket cost a staggering $2,422. This inflation acceleration has intensified particularly since 1970, suggesting the Fed's interventionist approach has fundamentally failed its primary mission.
The Fed's history is marked by periods of significant economic instability despite, or perhaps because of, its interventions. As economists Christina and David Romer have noted, "overly pessimistic views about the power of monetary policy have been a critical source of these failures" throughout Fed history. The central bank has oscillated between periods of hubris, believing it could fine-tune the economy, and periods of paralysis when faced with economic challenges, contributing to both the Great Depression and the inflation of the 1970s.
During the COVID-19 pandemic, the Fed cut interest rates to zero and engaged in approximately $1.6 trillion of Treasury security purchases over several weeks. While these measures temporarily stabilized markets, they also flooded the system with liquidity that contributed to subsequent inflation. By April 2025, the Fed's balance sheet stands at $6.7 trillion, an unprecedented level that represents massive ongoing intervention in markets.
Perhaps the most insidious effect of the Fed's readiness to intervene is the creation of moral hazard, a perverse incentive structure where financial institutions take excessive risks knowing the Fed will backstop their losses. This dynamic fundamentally corrupts market discipline.
John Crawford, in examining financial safety nets, notes that moral hazard "plays a central role in almost every narrative of the recent financial crisis, the government's implicit guarantees led to excessive risk-taking, and when the guarantees turned explicit, it exacerbated moral hazard going forward". Studies have established that bond prices do not fully incorporate risk for the largest, "too big to fail" financial firms, providing them an implicit subsidy and incentive for risk-taking.
The promise of intervention creates a self-reinforcing cycle, markets take greater risks because they expect rescue, which makes intervention more likely, which further encourages risk-taking. Collins' latest statement reinforces this destructive pattern, signaling to markets that the Fed stands ready to protect them from the consequences of economic policy decisions. The current market turmoil stems primarily from policy decisions regarding tariffs—a political choice with economic consequences. By positioning itself as ready to counteract the market effects of these policies, the Fed is inserting itself into a fundamentally political arena, potentially undermining both market discipline and its own independence.
The Federal Reserve operates under a complex and potentially contradictory set of responsibilities. It acts simultaneously as: (1) conductor of monetary policy; (2) financial stability regulator; (3) lender of last resort; (4) bank supervisor; and (5) payment system regulator and operator. Rather than creating efficiencies, these multiple roles often produce fundamental conflicts.
The spring 2023 U.S. banking crisis demonstrated this conflict when the Fed invoked its systemic risk authority, citing threats to financial stability emanating from the failure of institutions it supervised. This reflects a fundamental paradox. The very entity responsible for preventing crises through regulation becomes the entity that must rescue the system when those regulations fail.
Susan Collins' statement that intervention would depend on "what conditions we were seeing" reveals the subjective and potentially arbitrary nature of the Fed's decision-making process. This discretionary power, combined with these conflicting roles, creates a dangerous lack of accountability.
Current economic indicators signal potential structural problems that Fed intervention cannot solve. Year-ahead inflation expectations have surged to 6.7%, the highest reading since 1981, while long-run inflation expectations climbed from 4.1% in March to 4.4% in April 2025. St. Louis Fed President Alberto Musalem has acknowledged that "the impact of high tariffs on inflation would be not only brief or limited".
Meanwhile, New York Fed President John Williams now expects real GDP growth to slow "to somewhat below one percent" with unemployment rising from 4.2% to between 4.5% and 5% over the next year. These projections suggest fundamental economic challenges that monetary intervention cannot effectively address.
The typical Fed response, flooding markets with liquidity when trouble appears, masks deeper economic imbalances rather than resolving them. Market functionality problems often reflect real economic contradictions that need resolution, not suppression through artificial intervention.
Minneapolis Fed President Kashkari noted a concerning pattern following Trump's tariff announcements. U.S. Treasury yields have surged by 60 basis points over the past week while the S&P 500 has plummeted nearly 13%. Typically, Treasury yields decrease during periods of stress as investors seek safe havens, but the simultaneous decline in both stocks and bonds suggests investors may be reconsidering their commitment to U.S. assets altogether.
By intervening to "normalize" these markets, the Fed would be suppressing critical market signals about the economic viability of current policy directions. Such interventions don't solve underlying problems but merely postpone their inevitable manifestation.
The Federal Reserve's readiness to intervene in response to market reactions to political decisions inevitably entangles it in political considerations. When President Trump announced sweeping tariffs and then partially rolled them back in response to market turbulence, the Fed's statement about being ready to intervene effectively positions it as a counterbalance to presidential policy decisions, a deeply problematic position for an institution meant to operate independently.
This dynamic creates a perceived "Fed put," an implicit guarantee that the central bank will step in to protect markets from negative consequences of policy choices. This not only distorts market behavior, but undermines democratic accountability, as elected officials can pursue policies knowing the Fed will attempt to mitigate any negative market reactions.
A more honest approach would acknowledge that market discipline, including periods of stress and correction, plays a vital role in maintaining long-term economic health. The Fed's appropriate role should focus on ensuring market functionality while allowing price signals to operate.
As the Cato Institute's assessment bluntly concludes, "Available research does not support the view that the Federal Reserve System has lived up to its original promise". The institution has tended to err on the side of inflation while failing to enhance stability of real output.
The solution isn't more of the same interventionist approach but a fundamental reconsideration of the Fed's role. Rather than promising absolute readiness to intervene, Fed officials should acknowledge the limits of monetary policy and the importance of allowing markets to send clear signals about economic realities.
The greatest threat to financial stability may not be market fluctuations themselves but the repeated pattern of intervention that prevents necessary market adjustments and perpetuates unsustainable economic patterns. Each intervention sets the stage for larger future interventions, creating a system increasingly dependent on central bank support rather than fundamentally sound economic principles.
Susan Collins' statement of being "absolutely" ready to intervene represents not prudent stewardship but the continuation of a flawed approach that has repeatedly failed to deliver on its promises while creating new and more dangerous vulnerabilities in our financial system. Until we recognize the dangers of this interventionist mindset, we remain trapped in a cycle of increasing financial fragility masked by the false promise of central bank protection.
