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is Planet Money from

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NPR. Over

0:19

the past week, President Donald Trump

0:21

has gone from threatening to

0:23

oust Jerome Powell, the chair of

0:25

the Federal Reserve, to

0:27

saying he has no intention of

0:29

firing him. And this is not the

0:32

first time Trump has raised this possibility

0:34

of interfering with the Fed or

0:36

even firing Powell. Trump has

0:38

been loudly critical of Powell for

0:40

years now. And since January, the

0:42

president has accused him of playing

0:44

politics by keeping interest rates high. And

0:46

though so far Trump hasn't taken

0:49

any action to dump Powell, every

0:51

time Trump's anger at

0:53

the Fed chair flares, markets

0:55

quiver and economists start

0:57

flipping out. Because they say

0:59

the Fed has to be independent.

1:01

It has to focus on keeping the

1:03

economy healthy. And that process must

1:05

be free from politics and pressure. It

1:07

needs to just focus on what's

1:10

right for the economy. But

1:12

why exactly? Hello

1:14

and welcome to Planet Money. I'm

1:16

Darian Woods. And I'm Waylon Wong. Why

1:19

is the independence of the Federal

1:21

Reserve so sacred? Why does

1:23

just the idea of Trump interfering

1:25

with the Fed send economists into a

1:27

tizzy? Today on the show, a

1:29

primer on the Fed. From the

1:31

indicator podcast, we have three ways of looking

1:33

at that question for you today. We'll

1:35

look at what the Fed

1:37

does, why its independence is so

1:39

important, and one quieter step

1:41

President Trump has taken to influence

1:43

the Fed this year. This

1:51

message comes from NPR sponsor

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to learn more. Google is a

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trademark of Google LLC. The

2:19

Federal Reserve, the US central

2:22

bank, has two big goals,

2:24

keeping prices stable and jobs

2:26

plentiful. The Fed can do things

2:28

like change interest rates to address inflation. Raising

2:30

interest rates can bring down prices, but

2:33

could also make new mortgages more expensive.

2:36

And it can put people temporarily

2:38

out of work. Economist Carol

2:40

Abinder of the University of Texas told

2:42

us these can be unpopular moves

2:44

for a politician. If their goal

2:47

is to get elected in a

2:49

few months or even in a few

2:51

years, they're not going to worry

2:53

about the long run consequences of their

2:55

policy actions. So lower

2:57

interest rates, maybe they boost the

2:59

economy right now, but in the

3:01

longer run, maybe lead to inflation. The

3:04

Fed has more credibility. Investors

3:06

and the public generally believe it will

3:08

try to do what it takes. And that's

3:10

important in getting the job done. And

3:12

when we say the Fed is independent, We

3:15

don't mean it's completely separated

3:17

from democracy. While the president can't

3:19

say lower interest rates when they feel like

3:21

they're getting too high, the Fed

3:23

is accountable to the public in other

3:26

ways. Right. The president appoints the

3:28

members of the Federal Reserve Board. The

3:30

Federal Reserve's goals, low inflation and

3:32

high jobs are set by Congress. And

3:35

the agency is accountable to Congress.

3:37

Last summer, Republican Senator John Kennedy grilled

3:39

Fed Chair Jerome Powell. I got two

3:42

seconds. So when are you going to

3:44

lower interest rates? I'm today

3:46

not going to be sending any

3:48

signals about the timing of

3:50

any future actions. As much

3:52

as politicians might want to control interest

3:55

rates, they can't. And that's thanks

3:57

to an accord between the Treasury and

3:59

the Federal Reserve in 1951.

4:02

In the US, inflation was running high

4:04

after World War II and during the

4:06

Korean War. But the Fed had

4:08

a problem. It was effectively controlled

4:10

by the Treasury Department, which was

4:12

led by the President's Treasury Secretary.

4:15

And that got in the way

4:17

of the Fed doing its main

4:19

job, influencing the money supply, keeping

4:21

inflation down, aka monetary policy. So

4:23

what's called the Treasury Fed

4:25

Accord of 1951 is when the

4:27

Fed finally was kind of granted

4:29

independence to be able to conduct

4:32

monetary policy the way we would

4:34

think of it today. That didn't

4:36

mean that presidents didn't try to

4:38

influence the Fed, like think of

4:40

Arthur Burns, Fed chair in the

4:42

1970s. Most famous would be Richard

4:44

Nixon when he was pressuring Arthur

4:46

Burns for looser monetary policy to

4:49

try to help his re -election

4:51

chances. Lyndon Johnson also twisted

4:53

the screws on his fed chair at

4:55

the time. And through the

4:57

1970s and 80s, a consensus

4:59

started to emerge among economists. The

5:01

job of central banks to bring

5:03

down inflation was a lot easier

5:05

without politicians getting in the way,

5:08

trying to pressure the lever down.

5:11

And in return for more autonomy,

5:13

central banks could be more transparent

5:15

about their decision making. As economists

5:17

came to recognize the

5:19

benefits of transparency and

5:21

of independence, it

5:24

kind of became more accepted and

5:26

more part of the culture at

5:28

the Fed and even the culture

5:30

at central banks around the world. The

5:33

Bank of Japan, the Bank of

5:35

Mexico, and the Bank of England

5:37

became independent in the 1990s. The

5:39

European Central Bank was built as

5:41

independent from day one, and the

5:43

evidence suggests that independence works to

5:45

control inflation. Carolina Garriga is

5:47

a political science professor at the

5:49

University of Essex in the UK. Carolina

5:52

and her co -authors' research

5:54

finds that countries with more

5:56

independent central banks have lower

5:58

levels of inflation. But

6:00

like all good social scientists, she's

6:02

quick to note that correlation

6:04

doesn't always equal causation. It's

6:06

not causation, but it's a pretty

6:08

strong correlation that holds across time

6:11

from the 70s to two years

6:13

ago and across different kinds

6:15

of governments. A very strong

6:17

correlation that is

6:19

definitely pointing in a direction

6:21

and winking. Exactly. Carolina

6:23

also talks about countries that have eroded

6:26

their central bank independence. You can

6:28

see central bankers being fired and then

6:30

inflation spiking. I mean, I'm from

6:32

Argentina and I can give you many

6:34

examples. Sure. And this has happened

6:36

not only in Argentina, has happened in

6:38

Turkey, has happened in Hungary. When

6:41

an attack to central bank independence

6:43

becomes public, you can see

6:45

these facts in inflation going up. Karola

6:47

Binder at UT Austin says, in

6:49

the US, the consensus grew that

6:51

central bank independence was a good

6:53

thing. And this led to a

6:55

norm. Presidents were letting

6:57

the central banks do their

6:59

thing. Until the 2016 election,

7:01

when Trump started publicly and

7:04

loudly criticizing the Federal Reserve,

7:06

that continued into his presidency. He

7:08

appointed Fed Chair Jerome Powell,

7:11

but started making these public swipes

7:13

against him from 2018. This

7:15

was a major shift in the president's

7:17

relationship with the Fed. There had

7:19

been a norm for many years

7:21

that the president wouldn't, well,

7:24

I don't know which presidents had

7:26

Twitter, but they wouldn't go on Twitter

7:28

or something like that, ranting about

7:30

the Federal Reserve. So that was a

7:32

shift in kind of what was

7:34

seen as acceptable for a president to

7:36

do. Karola says these

7:38

comments are revealing. You frequently have

7:40

presidents who disagree with what

7:42

the Federal Reserve does. They

7:45

almost always disagree on the side

7:47

of we should have looser policy.

7:49

We should have lower interest rates.

7:51

So it shows you, well, if

7:53

we had left monetary policy in

7:55

the hands of the president, we

7:57

would have had more inflation. said,

8:00

Kerala says the public does want

8:02

accountability. Like, how did we

8:04

even get such high inflation? What went wrong?

8:06

How can we avoid that happening again?

8:08

The Fed should give them that kind of

8:10

accountability. It should be transparent about the

8:12

mistakes they made and what they've learned and

8:15

what they might change. Karela

8:17

does think there is a grain of

8:19

truth there in the frustrations that

8:21

might lead someone wanting a politician to

8:23

strong arm the economists. Think

8:25

about what we've been through,

8:27

the high inflation, the pandemic, and

8:29

then the global financial crisis

8:31

before that. The Fed was scrambling

8:33

to help, of course, and

8:35

that meant expanding its role and

8:37

taking on unconventional new action

8:39

like buying up tons of mortgage

8:41

securities and bonds. You

8:44

can see why there is

8:46

kind of more calls for

8:48

more oversight of the Fed

8:50

or calls to kind of

8:52

constrain it if it's seen as

8:54

maybe going beyond what its

8:56

original intentions were. That raises

8:58

the question, how did the Fed

9:00

become so powerful? Here

9:02

with me now is Gina Smiley,

9:04

reporter for The New York Times, who

9:07

wrote a book called Limitless. The

9:09

Federal Reserve takes on a new age

9:11

of crisis. And the

9:13

key thesis of this book is

9:15

that for better or for worse, the

9:17

Fed has amassed a huge amount

9:19

of power over the economy. That is

9:21

correct. And there's this key moment

9:23

at the peak of the early pandemic

9:25

chaos where this becomes really clear.

9:28

Right. This is the morning that the

9:30

Fed rolls out a bunch of details

9:32

on several market rescue programs that it

9:34

is setting up that it has never

9:36

set up before. And then Jerome

9:38

Powell goes on a webcast with the

9:40

Brookings Institution and the host of it.

9:43

says, you know, what are the limitations

9:45

here? You know, what are you capable

9:47

of? And chair Powell replies. But

9:49

there really, there's no limit on how much

9:51

of that we can do other than that it

9:53

must meet the tests under under under the

9:55

law as there is no limit. There's no

9:57

limit. And I think that's kind of a mic

9:59

drop when it comes to the world

10:02

of central banking, because he's basically saying

10:04

that here at the Fed, we

10:06

have this ability to sort of at

10:08

least temporarily print money out of

10:10

thin air. And we can use that

10:12

to really safeguard every important market. A

10:14

mic drop moment indeed. Right.

10:16

So let's start with why the Federal

10:18

Reserve tries to be politically independent. So

10:21

if you had a federal reserve that

10:23

was super linked up with politicians

10:25

who are worried about reelection, they might

10:27

really not focus on the inflation

10:29

side of their mandate. And did

10:31

you come across any stories

10:33

that reveal how Fed Chair Jerome

10:36

Powell personally considers his role? Yeah.

10:39

So chair Powell will often say things like,

10:41

this is a matter for Congress to decide.

10:43

This is a matter for politicians to decide. The

10:45

great example of how chair Powell was

10:47

really trying to keep the Fed limited and

10:50

within its length. There had been

10:52

some appetite on the Hill to

10:54

see the Fed get into municipal lending

10:56

leading up to the pandemic. We

10:58

saw some Democrats saying back when the

11:00

financial crisis hit, banks got bailed

11:02

out, but Detroit didn't get bailed out.

11:04

And how is that fair? Why

11:07

isn't it equally important to ensure that state

11:09

and local governments have access to credit? You

11:13

know, we don't have authority, I don't believe,

11:15

to lend to state and local governments. I

11:18

think we That could be a tool. I

11:21

don't think we want that authority. I think we

11:23

want... I think that's something for Congress to

11:25

do. So these ideals of

11:27

the Fed and these ideals of Jerome

11:29

Powell are all very well in

11:31

what we call beast time, but... think

11:33

back to the early days of

11:36

the pandemic, early 2020. I

11:38

think it's easy to forget now, but at the

11:40

same time that we were all trying to

11:42

figure out how to do work from home and

11:44

how to adjust to maybe some job losses

11:46

in our families and those kinds of challenges, the

11:49

markets were trying to adjust to a world

11:51

where we didn't know if people would ever come

11:53

back to offices and we didn't know which

11:55

government debt was going to be safe. And what

11:57

this resulted in was just a run for

11:59

the exits. People wanted cash. They thought cash was

12:01

the only thing that was safe and they

12:03

were selling. everything else. And so we saw

12:05

huge breakdowns across a whole range of markets

12:07

that usually are very safe. And this is

12:09

the kind of thing that's going to hit

12:11

not just Wall Street, but almost certainly Main

12:13

Street as it continues. Yeah. But as

12:15

Jerome Powell has a habit of saying, there are

12:17

no atheists in a foxhole. You

12:19

know, sometimes you change your mind in a crisis. Yeah.

12:22

And I think sometimes you change your mind

12:24

when not changing your mind is going to

12:26

cause the worst problem. And when

12:28

we're talking about the Fed

12:30

pushing past its previous boundaries, It

12:33

seems to me there are two

12:35

key dates with two key sets of

12:37

policies that forever changed what the

12:39

Fed was capable of. So tell me

12:41

about that first Fed bundle of programs

12:43

in late March of 2020. So

12:46

we get to March 23rd 2020

12:48

and we see the Fed

12:50

jump into a bunch of markets

12:52

that it hasn't previously touched.

12:54

It rolled out a corporate bond

12:56

buying program and a program

12:58

that was sort of promising to

13:00

help out mainstream companies. So

13:02

not just the big multinational companies,

13:04

but I guess aimed at mid

13:07

-sized or even small businesses. Yeah.

13:09

And I described this in my book

13:11

as somebody described it to me, which

13:13

is it was really about covering the

13:15

waterfront. They wanted to make sure that

13:17

they were trying to service sort of

13:19

every place that you might see borrowing

13:21

and lending break down in the economy.

13:24

Jerome Powell appears on TV pretty

13:26

soon after. Joining us now in

13:28

a rare and exclusive live interview is

13:30

Jerome Powell. He's on the Today

13:32

Show to explain this package. Is

13:34

that unusual for a fed chair? It's

13:37

pretty unusual. The fed

13:39

chairs tend to stick to the

13:41

more business -oriented publications and TV

13:43

shows. I think they were trying

13:45

to reassure the country that they

13:47

were really bringing out the big

13:49

guns. You're saying, no, it's not

13:51

a blank check, but Yes, you're

13:53

prepared to spend an unprecedented amount. We

13:56

certainly are. And then it seems

13:58

like that had an effect. It calmed the markets.

14:01

But even that huge response

14:03

didn't totally resolve all the jitters.

14:05

So let's go through that second

14:08

big fire hose in early April

14:10

2020. So April 9th, 2020

14:12

rolls around, and the Fed

14:14

rolls out a big new

14:16

package that includes a municipal lending

14:18

program. And it also adds

14:20

in junk bonds to the

14:22

Fed's bond purchase program. And

14:24

those are two pretty uncomfortable things for

14:26

the Fed to do. The Fed has openly

14:28

said that it doesn't want to be

14:30

involved in the municipal bond market. And the

14:33

junk bond market is also pretty unattractive

14:35

because it's this big market of people who

14:37

took on, in some cases, a pretty

14:39

significant amount of risk. And no central bank

14:41

wants to feel like they're bailing out the

14:43

junk bond market. But the concern is these

14:45

are big companies. If you leave

14:47

this market completely closed, if it fails

14:49

to operate the way it should, if

14:51

it becomes impossible for people to issue

14:53

debt at rates that they can afford

14:55

to manage to stay in business, you

14:57

could have a huge round of layoffs

14:59

just because this market is flailing. And

15:02

so that day, Jerome Powell crosses another

15:04

one of his kind of personal lines.

15:06

He seems like he's kind of recommending

15:08

things for the politicians to do. In

15:10

many cases, what people really need is

15:12

direct fiscal support rather than a loan.

15:15

And what we can do is loan.

15:17

So there's a big need for fiscal

15:19

policy. So tell me about that. Yeah.

15:21

So what he's saying basically

15:24

here is, Dear Congress. We're

15:26

trying to help people, but people need

15:28

money to keep their businesses open or

15:30

money to make up for the fact

15:32

that they're not going to work, etc. And

15:35

we've just had the CARES Act passed, but the

15:37

CARES Act was always meant to be pretty short term.

15:39

And this is Jerome Powell being clear that

15:41

like the Fed cannot solve every problem

15:43

here, Congress needs to act. The Fed

15:45

does in general try to stay in its

15:47

lane or at least operate under the powers

15:50

given to it by the Federal Reserve Act.

15:52

But it is enormously powerful and has

15:54

been lending to all kinds of

15:56

areas of the economy. And

15:58

in doing so, it was kind of

16:00

picking winners and losers. That

16:03

is not apolitical. So

16:05

now it finds itself firmly

16:07

in political crosshairs. Gina

16:09

Smilik, thank you so much for talking to

16:11

the indicator. Thank you for having me. After

16:14

the break, an executive order that

16:16

lays the groundwork for more presidential

16:18

control. So

16:20

ideally the Fed's decisions on interest

16:23

rates should be independent. That's where

16:25

we started when Trump was inaugurated

16:27

in January. But since then,

16:29

a lot has happened. President

16:31

Trump has signed more executive orders

16:33

than any president this early in

16:35

the term. He has been spilling

16:38

the presidential ink. And as

16:40

we know, many of these orders will

16:42

be tied up in court for the foreseeable

16:44

future. But we want to

16:46

focus on this one executive order as it

16:48

relates to the Federal Reserve. Trump

16:50

signed an executive order in mid -February

16:52

to make sure agencies follow the

16:54

president's priorities. It put tighter control

16:56

on how these agencies spend and

16:58

regulate. And it applied

17:00

to agencies like the Securities and

17:02

Exchange Commission, the Federal Trade Commission,

17:04

and the Federal Reserve. Now,

17:06

there's one big asterisk here. The

17:09

executive order says it only applies

17:11

to the Federal Reserve's role in

17:13

safeguarding the financial system. doesn't

17:15

apply to the feds raising and

17:17

lowering of interest rates to fight inflation

17:20

and protect jobs. You know, monetary

17:22

policy. Catherine charges a law

17:24

professor at Columbia University. There is

17:26

an effort to signal, look, we don't

17:28

want to mess with monetary policy. So it

17:30

seeks to provide a little bit of

17:32

calm and status

17:34

quo maintenance. Catherine

17:37

says it's widely accepted that less

17:39

independent central banks end up

17:41

with higher inflation. Research backs this

17:43

up. The evidence is less clear

17:45

about the effects of having the

17:47

Fed's bank supervision and regulation role

17:49

under the grip of politicians. And

17:52

so it makes sense that

17:54

President Trump specifically carved out the

17:56

Fed's monetary policy as staying

17:58

independent. But big question

18:00

is how this division would work

18:02

in practice. It also raises

18:04

questions over how the Fed might

18:06

intervene when something goes wrong. For

18:09

example, when Silicon Valley Bank ran

18:11

into financial trouble in 2023, the

18:13

Fed stepped in to lend it

18:15

money. Would those decisions now

18:17

be subject to White House review?

18:19

Catherine says the problem with this approach is

18:21

if the White House begins to meddle

18:23

in some functions of the Fed, it would

18:25

undermine other decisions made by the individuals

18:27

at the Fed. So the core challenge is

18:29

you have these individuals who are

18:31

playing multiple roles. And

18:34

how credible is it that

18:36

they are going to maintain independence on

18:38

one front and not others? Fed

18:41

Chair Jerome Powell has been fielding more

18:43

questions lately over whether his decisions

18:45

on interest rates will be influenced by

18:47

Trump or, for that matter, Elon

18:49

Musk. Here's what Powell told a

18:51

House Committee in February about potential executive

18:53

branch interference. What we're going

18:55

to do at the Fed is keep our

18:57

heads down and keep working, wait

19:00

to see what new policies

19:02

emerge, and trying to make

19:04

a thoughtful, sensible set of policies

19:06

on our part once we understand the

19:09

implications of those. Classic Powell keeping

19:11

his head down, doing the work. Please

19:13

don't bother me. I would not expect anything

19:15

less from him. You know, we

19:17

reached out to the White House to

19:19

ask how this division would be managed.

19:22

According to a senior administration official, the

19:24

Office of Management and Budget will oversee

19:26

all the Fed's regulations not related to

19:28

monetary policy. We also asked if

19:30

it could erode the credibility of the Fed's

19:32

decisions to raise or lower interest rates. The

19:35

same statement said no, and to

19:37

quote, include that accusation in your story

19:39

would not be accurately reporting the

19:41

executive order. Jerome Powell's term as

19:43

chair expires next year. So if

19:45

Trump wants to go in a different

19:47

direction on monetary policy, that would

19:49

be his earliest opportunity. Unless

19:52

he decides to take unprecedented

19:54

and possibly illegal actions

19:56

sooner. The

20:00

original episodes from The Indicator were produced

20:02

by Corey Bridges, Brittany Cronin, and Julia

20:04

Ritchie. They were engineered by Sena LaFredo,

20:06

James Willett, and Gilly Moon. They were

20:08

fact -tracked by Sierra Juarez. Kate Kincannon

20:10

is the editor of The Indicator. Follow us

20:12

wherever you get your podcasts. This

20:15

episode of Planet Money was produced by

20:17

James Snead and edited by Marianne McEwn

20:19

and Mary Childs. Alex Goldbach is our

20:21

executive producer. I'm Darian Woods. And

20:23

I'm Waylon Wong. This is NPR. Thanks

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for listening.