President Donald Trump has been loudly critical of Federal Reserve Chair Jerome Powell for years now. Since January, the President has accused him of playing politics by keeping interest rates high. Trump has also threatened to oust Powell — which would mark an extraordinary shift away from the independence of the central bank.Today on the show, three Indicators: a short history of the Federal Reserve and why it's insulated from day-to-day politics; how the Fed amassed a ton of power in recent years; and a Trump executive order that took some of that power away.The original episodes from the Indicator were produced by Corey Bridges, Brittany Cronin, and Julia Ritchey. They were engineered by Cena Loffredo, James Willetts, and Gilly Moon, and fact-checked by Sierra Juarez. Kate Concannon is the editor of the Indicator. Follow us wherever you get your podcasts.This episode of Planet Money was produced by James Sneed and edited by Marianne McCune & Mary Childs. Alex Goldmark is our executive producer.For more of The Indicator from Planet Money, subscribe to Planet Money+ via Apple Podcasts or at plus.npr.org. Or, find us: TikTok, Instagram, Facebook.Listen free at these links: Apple Podcasts, Spotify, the NPR app or anywhere you get podcasts.Help support Planet Money and hear our bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy
Chapter 1: Why has President Trump criticized Jerome Powell?
This is Planet Money from NPR. Over the past week, President Donald Trump has gone from threatening to oust Jerome Powell, the chair of the Federal Reserve, to saying he has no intention of firing him.
And this is not the first time Trump has raised this possibility of interfering with the Fed or even firing Powell. Trump has been loudly critical of Powell for years now. And since January, the president has accused him of playing politics by keeping interest rates high.
And though so far Trump hasn't taken any action to dump Powell, every time Trump's anger at the Fed chair flares, markets quiver and economists start flipping out. Because they say the Fed has to be independent. It has to focus on keeping the economy healthy. And that process must be free from politics and pressure. It needs to just focus on what's right for the economy. But why exactly?
Hello and welcome to Planet Money. I'm Darian Woods.
Chapter 2: What is the importance of the Federal Reserve's independence?
And I'm Weyland Wong. Why is the independence of the Federal Reserve so sacred? Why does just the idea of Trump interfering with the Fed send economists into a tizzy?
Today on the show, a primer on the Fed. From the Indicator podcast, we have three ways of looking at that question for you today. We'll look at what the Fed does, why its independence is so important, and one quieter step President Trump has taken to influence the Fed this year. The Federal Reserve, the US central bank, has two big goals, keeping prices stable and jobs plentiful.
Chapter 3: How does the Federal Reserve influence the economy?
The Fed can do things like change interest rates to address inflation. Raising interest rates can bring down prices. But it could also make new mortgages more expensive. And it can put people temporarily out of work. Economist Carol Abinder of the University of Texas told us these can be unpopular moves for a politician.
If their goal is to get elected in a few months or even in a few years, they're not going to worry about the long-run consequences of their policy actions. So lower interest rates, maybe they boost the economy right now, but in the longer run, maybe lead to inflation.
The Fed has more credibility. Investors and the public generally believe it will try to do what it takes, and that's important in getting the job done.
And when we say the Fed is independent, we don't mean it's completely separated from democracy. While a president can't say lower interest rates when they feel like they're getting too high, the Fed is accountable to the public in other ways.
Right. The president appoints the members of the Federal Reserve Board. The Federal Reserve's goals, low inflation and high jobs, are set by Congress. And the agency is accountable to Congress.
Last summer, Republican Senator John Kennedy grilled Fed Chair Jerome Powell. I got two seconds. So when are you going to lower interest rates?
I'm today not going to be sending any signals about the timing of any future actions.
As much as politicians might want to control interest rates, they can't. And that's thanks to an accord between the Treasury and the Federal Reserve in 1951. In the US, inflation was running high after World War II and during the Korean War. But the Fed had a problem. It was effectively controlled by the Treasury Department, which was led by the president's treasury secretary.
And that got in the way of the Fed doing its main job, influencing the money supply, keeping inflation down, a.k.a. monetary policy.
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Chapter 4: What historical events led to the Fed's independence?
As economists came to recognize the benefits of transparency and of independence, it kind of became more accepted and more part of the culture at the Fed and even the culture at central banks around the world.
The Bank of Japan, the Bank of Mexico, and the Bank of England became independent in the 1990s. The European Central Bank was built as independent from day one. And the evidence suggests that independence works to control inflation.
Carolina Garriga is a political science professor at the University of Essex in the UK. Carolina and her co-author's research finds that countries with more independent central banks have lower levels of inflation. But like all good social scientists, she's quick to note that correlation doesn't always equal causation.
It's not a concession, but it's a pretty strong correlation that holds across time from the 70s to two years ago and across different kinds of governments.
A very strong correlation that is definitely pointing in a direction and winking.
Exactly. Carolina also talks about countries that have eroded their central bank independence.
You can see... central bankers being fired and then inflation spiking. I mean, I'm from Argentina and I can give you many examples. And this has happened not only in Argentina, has happened in Turkey, has happened in Hungary. When an attack to central bank independence becomes public, you can see these spikes in inflation going up.
Carol Abinder at UT Austin says, in the US, the consensus grew that central bank independence was a good thing. And this led to a norm. Presidents were letting the central banks do their thing. Until the 2016 election, when Trump started publicly and loudly criticizing the Federal Reserve. that continued into his presidency.
He appointed Fed Chair Jerome Powell, but started making these public swipes against him from 2018. This was a major shift in the president's relationship with the Fed.
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Chapter 5: How has Trump attempted to influence the Federal Reserve?
That raises the question, how did the Fed become so powerful? Here with me now is Gina Smiley, reporter for The New York Times, who wrote a book called Limitless. The Federal Reserve Takes on a New Age of Crisis. And the key thesis of this book is that for better or for worse, the Fed has amassed a huge amount of power over the economy. That is correct.
Chapter 6: What is the relationship between central bank independence and inflation?
And there's this key moment at the peak of the early pandemic chaos where this becomes really clear.
Right. This is the morning that the Fed rolls out a bunch of details on several market rescue programs that it is setting up that it has never set up before. And then Jerome Powell goes on a webcast with the Brookings Institution and the host of it says, you know, what are the limitations here? You know, what are you capable of? And Chair Powell replies.
But there really there's no limit on how much of that we can do other than that it must meet the tests under the law. There is no limit.
There's no limit. And I think that's kind of a mic drop when it comes to the world of central banking, because he's basically saying that here at the Fed, we have this ability to sort of at least temporarily print money out of thin air. And we can use that to really safeguard every important market.
A mic drop moment indeed. Right. So let's start with why the Federal Reserve tries to be politically independent.
So if you had a Federal Reserve that was super linked up with politicians who are worried about re-election, they might really not focus on the inflation side of their mandate.
And did you come across any stories that reveal how Fed Chair Jerome Powell personally considers his role?
Yeah. So Chair Powell will often say things like this is a matter for Congress to decide. This is a matter for politicians to decide. The great example of how Chair Powell was really trying to keep the Fed limited and within its lane. You know, there had been some appetite on the Hill to see the Fed get into municipal lending leading up to the pandemic.
You know, we saw some Democrats saying back when the financial crisis hit, banks got bailed out. But, you know, Detroit didn't get bailed out.
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Chapter 7: What powers does the Federal Reserve have in times of crisis?
That could be a tool.
I don't think we want that authority. I think that's something for Congress to do.
So these ideals of the Fed and these ideals of Jerome Powell are all very well in what we call peacetime. But let's think back to the early days of the pandemic, early 2020.
I think it's easy to forget now, but at the same time that we were all trying to figure out how to do work from home and how to adjust to maybe some job losses in our families and those kinds of challenges, the markets were trying to adjust to a world where we didn't know if people would ever come back to offices. And we didn't know which government debt was going to be safe.
Chapter 8: How does Jerome Powell view the Fed's role in politics?
And what this resulted in was just a run for the exits. People wanted cash. They thought cash was the only thing that was safe. And they were selling everything else. And so we saw huge breakdowns across a whole range of markets that usually are very safe. And this is the kind of thing that's going to hit not just Wall Street, but almost certainly Main Street if it continues.
Yeah. But as Jerome Powell has a habit of saying, there are no atheists in a foxhole. You know, sometimes you change your mind in a crisis.
Yeah. And I think sometimes you change your mind when not changing your mind is going to cause the worst problem.
And when we're talking about the Fed pushing past its previous boundaries, it seems to me there are two key dates with two key sets of policies that forever changed what the Fed was capable of. So tell me about that first Fed bundle of programs in late March of 2020.
So we get to March 23rd, 2020, and we see the Fed jump into a bunch of markets that it hasn't previously touched. It rolled out a corporate bond buying program and a program that was sort of promising to help out Main Street companies.
So not just the big multinational companies, but I guess aimed at midsize or even small businesses. Yeah.
Yeah. And I describe this in my book as somebody described it to me, which is it was really about covering the waterfront. They wanted to make sure that they were trying to service sort of every place that you might see borrowing and lending break down in the economy.
Jerome Powell appears on TV pretty soon after.
And joining us now in a rare and exclusive live interview is Jerome Powell.
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