For people investing for the long term, the Federal Reserve (often called “the Fed”) plays an important role in keeping the economy and financial system healthy. This will matter even more in 2026 because Jerome Powell’s time as Fed Chair ends in May. This gives the White House a chance to choose new leadership for the central bank, which could affect interest rates, the stock market, and your investments.
News stories often talk about the Fed’s next decision on interest rates. But many people on Wall Street and in Washington are also discussing what the Fed’s job should actually be. The Fed’s responsibilities have changed over time as it responded to financial crises and economic ups and downs. For many investors, this can be a topic people disagree about. There are natural differences in opinion about how much power the Fed should have and what actions it should take today regarding interest rates and the money supply.
As we look toward next year, these topics are important because they influence not just decisions happening soon, but the future direction of the Fed itself. What background information do investors need as Fed news fills the headlines in the coming months?
The Fed’s responsibilities have grown over time
The Federal Reserve was created by the Federal Reserve Act of 1913. It was the third try at setting up a central bank for the United States. The Fed is not part of the federal government, and it wasn’t created by the Constitution. Because of this, there are three main concerns that often come up about Fed independence: 1) its duties have grown a lot over the years, 2) Fed officials are not voted in by the public, and 3) elected politicians often want lower interest rates to help the economy and create jobs.
When Congress first created the Fed, its main job was to stop bank panics. During the 1800s and early 1900s, these panics happened often and caused problems for businesses and everyday people. The worst crises from that time include the Great Depression, the Panic of 1907, the Panic of 1893, and many others. Usually, these happened or got worse when there was a “run on a bank.” This is when people lost trust in a bank and rushed to take out their money, putting both the bank and the whole financial system at risk.
While economic and financial problems haven’t disappeared, these specific types of crises happen less often today. The Fed makes sure that banks have enough money in reserve. More importantly, the Fed also acts as the “lender of last resort.” This means it serves as a safety net when a panic might happen. Knowing that the Fed is ready and able to step in helps keep the financial system stable and ensures that transactions happen smoothly. This was tested most recently during the 2020 pandemic and the 2023 regional bank crisis.
Over the years, though, the Fed’s duties have expanded. The Federal Reserve Reform Act of 1977 was passed during a time of high inflation (rising prices) and unemployment (people out of work). It told the central bank to promote “maximum employment, stable prices, and moderate long-term interest rates.” The Fed usually focuses on the first two as its “dual mandate.” It sees the third goal as something that happens naturally when the first two are achieved.
This growth in responsibilities is often called “mission creep” because the Fed is now seen as managing not just banks, financial transactions, and the dollar’s value, but the overall health of the economy. Whether this is right or wrong, it’s why people pay so much attention to each interest rate decision made by the Federal Open Market Committee (FOMC). People watch not only for where rates are headed, but for clues about how the Fed views the broader economy.
Fed independence involves give and take
Fed officials are chosen by the president and approved by Congress, but they are not directly voted in by the public. Critics say the Fed is an unelected group with huge economic power that affects all Americans. Supporters say the Fed must often make unpopular decisions, including ones that may slow the economy in the short term to protect long-term growth. Both arguments have some truth, so keeping a balanced view can be hard.
The 1970s and early 1980s are often used as a good example of this tradeoff. During that time, economic shocks and political pressure for easy money policies led to “stagflation.” This is when you have both high inflation and high unemployment at the same time. Eventually, Fed Chair Paul Volcker raised interest rates dramatically. This caused a recession (an economic downturn) that ultimately ended the stagflation problem. This event helped establish Fed independence over the following decades.
Of course, the Fed doesn’t have a crystal ball and isn’t always right in its judgments. Former Fed Chair Ben Bernanke famously told economist Milton Friedman that “you’re right, we did it.” He was talking about poor policy choices that made the Great Depression worse a century ago. More recently, many economists and investors thought the Fed was too slow to respond to inflation that started appearing in 2021 after the pandemic. This slowness meant the Fed had to raise interest rates quickly and sharply.
Even if the Fed could perfectly predict the future, its policy tools are limited. The Fed mainly controls short-term interest rates through something called the federal funds rate. This is often called a “blunt instrument” because adjusting just one policy rate cannot fix many of the underlying problems in the economy. This includes supply chain problems that began in 2020 and pushed prices higher, uncertainty about trade due to tariffs, or potential job market challenges from artificial intelligence.
Also, the Fed can only indirectly influence longer-term interest rates. These longer-term rates matter more for home mortgages, business loans, and investment decisions. These rates are set by market forces including what people expect inflation to be, government spending policies, and economic growth. So while the Fed is often seen as controlling the economy and financial system, it is often influencing markets or responding to events rather than directly controlling them.
Leadership changes could shape policy direction in 2026 and beyond
With Fed Chair Jerome Powell’s term ending soon, the White House is expected to name a replacement early in 2026. Right now, the leading candidates include Kevin Warsh, a former Fed governor, and Kevin Hassett, Director of the National Economic Council at the White House. Much could change between now and the final decision, and the leading candidates have shifted in just the past few months.
The chart above shows the FOMC’s latest Summary of Economic Projections. These numbers suggest the Fed may cut rates only once in 2026 and once in 2027. No matter who the next Fed Chair will be, it’s likely that the administration will choose someone who prefers to keep interest rates lower. This means these projections may change in the coming months.
At the same time, it’s important not to overreact to possible changes in policy. While the Fed Chair has influence over policy direction and speaks for the FOMC at press conferences, the committee includes twelve voting members with different views. This includes the New York Fed President, seven Fed governors, and four regional bank presidents who rotate annually. Historically, the Fed has tried to reach agreement among its members. So even a Chair who agrees with the administration’s policy goals will need to convince other committee members with economic arguments and policy reasoning.
Taking a broader view is helpful here because this isn’t the first time the Fed has changed leadership. The first chart above shows that the economy has grown steadily across different Fed Chairs appointed by both political parties. It’s also important to remember that Jerome Powell was nominated by President Trump during his first term and stayed on as Fed Chair during President Biden’s term.
What matters more than any individual Chair is whether the Fed’s policies fit the economic conditions. Again, the Fed is often responding to unexpected events outside of its control, rather than directly steering the economy.
Economic trends matter more than individual Fed decisions
While there will be many more news stories about Fed leadership in the coming months, what truly matters is the overall direction of the economy. The next Fed Chair may generally prefer lower interest rates, but this will depend heavily on whether the job market stays weak and if inflation continues to stabilize. For investors, the key is to maintain an investment portfolio that matches your financial goals rather than react to daily speculation about the Fed.
The bottom line? History shows that markets have done well across different Fed Chairs and policy approaches. For investors, focusing on long-term trends is still the best way to reach financial goals.
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