Jerome Powell and the Future of Fed Independence

Introduction to Episode

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0:20Today is Jerome Powell's last day as Fed chair, at least he'll still be on the Fed board that he's allowed to do until 2028. Now, some quick hits from what has been a pretty eventful tenure. The Powell Fed faced a once in a century pandemic. Oversaw the economy as inflation spiked to 9.1 percent and then went back down to nearly 2 percent. And now as inflation has started to go back up, as the U.S. has gone to war and continues to try and levy the most comprehensive tariffs since the 1940s.

0:54But beyond all that, perhaps Powell will be most remembered as a target of angry tweets, speeches, ultimately a criminal investigation by President Trump and his administration, the very president who nominated him in the first place.

Trump-Powell Tensions

1:10And I remember the moment we at Planet Money really started paying attention to the Trump-Powell tensions. It happened about 10 months after Powell was appointed, back in 2018. The Federal Reserve had raised rates a few times. Inflation was still sort of uncomfortably high. And the day before the upcoming Fed meeting, President Trump tweets that it is, quote, incredible that, quote, the Fed is even considering yet another interest rate hike. And then tweeted again the next day that the Fed better not, quote, make yet another mistake.

1:44Later that day, the Fed did do another interest rate hike. They seemed to ignore the president's tweets. But at the time, we had simply never seen anything like this before. For most Americans' lives, this kind of presidential meddling was unprecedented. Because it is generally understood to be quite bad for the president of the United States to strong arm the chair of the Federal Reserve. Because it's impossibly important for our central bank to not worry about the short-term political whims.

Fed Independence

2:17The Fed will often need to do unpopular things that politicians don't like, such as raising interest rates and slowing down the economy before inflation, you know, inflates. This idea is known as Fed independence. And those tweets kicked off a semi-regular, unofficial series at Planet Money about Fed independence. We even tried to create a Fed independence holiday. We even had a special guest endorse that holiday. Big special. This is Janet Yellen, former chair of the Board of Governors of the Federal Reserve.

2:49I want to wish everybody a very happy Fed independence day. Yell it from the rooftops, Janet. Get the Hallmark cards out. That hasn't really taken off, but that's okay. Because, generally speaking, the kinds of Fed independence episodes that we have made over the last eight years, they looked at the famous case studies of other times a U.S. president tried to pressure their Fed chair. These are history stories. Because history stories are what you look to when you're in the middle of something, when you don't know how your own story is going to end.

3:24Well, as of today, folks, we finally do know how our story ends. Or at least Jerome Powell's. And honestly, that story was wilder and more alarming than we could have ever imagined back in 2018.

3:39Hello and welcome to Planet Money. I'm Kenny Malone. And I'm Erica Barris. Today on the show, where does the Jerome Powell story fit into the sweep of history? We'll hear from someone who was on the Fed board when Powell became chair and when Trump started to pressure Powell. Plus, we will learn what signs to watch for to tell whether Fed independence is crumbling or standing strong as the new Trump-nominated Fed chair takes office.

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Cautionary Tales

5:45Up until now, there have only really been two cautionary tales in Fed Independence history. Right. Let's call them two entries in, I want to say, Fed Independence Hall of Fame, but that's not quite right. I guess it's the Fed Hall of Infamy, yes? Yeah, that sounds right. Two entries. And each of them teach us what happens when a president starts to pressure a Fed chair and just how bad it can get. The first of those moments? Bill, I just wanted to thank you for your most thoughtful and generous letter, and I appreciate it so much.

6:16This is President Lyndon B. Johnson, days after taking office, calling to introduce himself to then-Fed Chair William Bill McChesney Martin. And Johnson was just calling to say hi, you know, to say, like, you're the expert, Bill. I'm just here to listen to you about monetary policy. Well, you just assume that you're starting with someone that doesn't know much about your shop, and then you start to tell me what I ought to know about it. Well, I certainly will help in every way that I can, Mr. President, I'm sure. So fun. So charming. So folksy.

6:47Yeah, so nice. McChesney Martin was Fed chair in a hugely important time for Fed independence. In fact, Fed independence was a brand new experiment for the United States. Right. So in the olden days, the Fed kind of did take orders from the president because the Fed took orders from Treasury, which took orders from the president. And it was a classic mess. After World War II, inflation started spiraling. President Truman insisted the Fed not raise rates. Inflation hit 21 percent.

7:19The Fed was like, no, no, we cannot let this happen again. And on March 4th, 1951, Fed Independence Day, the Treasury and Fed issued a totally unassuming little memo basically saying, henceforth the Treasury. And therefore, the president is leaving the Fed alone. We're out. We're letting you be. But this was not like a law or anything. It was just really a handshake deal that worked fine, honestly, until Lyndon B. Johnson came into office.

7:51Well, Lyndon Johnson had a reputation for being a manipulator. He remembered slights, he exchanged favors, and he played them like fiddles. That is Bob Bremner, who wrote the biography of McChesney Martin. And within two years, Johnson is really mad at McChesney Martin, his Fed chair, for raising interest rates. Bob says that Johnson forces McChesney Martin to fly down to Johnson's ranch in Texas, calls him into the office. And Johnson is just fit to be tied.

8:24Yeah. Johnson, real mad. He was hot. Now, we don't know exactly what was said in that office, but... There is a reference to the fact that Johnson was so angry that he pushed Martin against the wall. The president of the United States... Yes. ...laid hands on... Yes. ...his Fed chair? Yes. And what does Martin do? Well, Martin says, Mr. President, I do have the very strong conviction that this is one of those few occasions where the Federal Reserve decision has to be final.

8:57And this is a huge moment. McChesney Martin stands up to LBJ and says, no, this little memo from 1951 is more than a handshake. The Fed is not going to be bullied into doing what the president wants. Yeah. I mean, if you want one single moment when the Federal Reserve defined its independence, that's it. And so, William McChesney Martin is the good cautionary tale. The bad cautionary tale? Well, that would be the chairship of one Arthur Burns.

9:31Arthur Burns had a reputation of being an extremely cautious monetary economist. That is Professor Burton Abrams. He spent decades studying monetary policy and sort of uncovered why the Burns chair ship was such a mess by digging through the Nixon tapes. The Nixon tapes. Hello, Arthur. How are you, Mr. President? Hi, how are you? Fine. Did you have a good trip? Oh, yeah. I just got back from Chicago. I know. This is Richard Nixon talking to Arthur Burns.

10:01And in the Nixon tapes, there are some, how do we say, rough phone calls for Fed independents. Yeah, Nixon was strong-arming Burns to juice the economy leading up to Nixon's re-election. There were rumors going around at the time of the White House functionally taking over the Fed. And it sure seems like Burns caved in the face of these threats and rumors. And in the tapes, you'll hear Arthur Burns sound like a lapdog bringing Nixon the policies he wants.

10:34Look, I wanted you to know we reduced the discount rate today. Oh, yeah, yeah, yeah, good, good. And what is it now? Four, four and a half? No, we got it down to four and a half percent. Four and a half, yeah. Oh, it's a bad look, Erica. A little wild. It's a bad look. It's a lot. Ultimately, economist Burton Abrams says all of this tanked Arthur Burns' reputation. Yeah, Arthur Burns was a very well-respected economist, and he wound up creating one of

11:05the worst inflationary experiences in the last hundred years. Yeah, eventually, in the early 80s, inflation peaked at, get this, 14.6 percent. And it certainly did seem that U.S. presidents after that learned their lesson. For decades, we simply did not see a sitting president actively pressuring their Fed chair. So it is not a particularly controversial opinion that Fed independence is hugely important. There's a whole economic literature on what's called the inflation bias.

11:38And a big part of that is the idea that governments, when given the choice, will tend towards forcing their central banks into things that cause inflation, keeping interest rates low, printing too much money, et cetera. And so, governments that take away their own choice tend to do much better. Developed nations that let their central banks act independently tend to have considerably lower inflation overall. And this is why, back in 2018, just a handful of tweets from President Trump telling his Fed to, you know, not make another mistake again, this set off alarm bells for us at Planet Money.

12:13Also, I guess, for Burton Abrams. I confess I've voted for Donald Trump, but he's not a very good monetary policy manipulator. So I would wish he would stay out of that. Because Burton Abrams is the expert on the worst case scenario, the Arthur Burns scenario, which was why he was also our first call to discuss how Fed chair Jerome Powell ultimately handled Trump's pressure.

12:44My question is for you, for someone who studied these important historical case studies, was Jerome Powell ultimately more like McChesney Martin, more like Burns?

12:56Well, I would say he was more like William McChesney Martin. He actually stood up to Trump when Trump was demanding lower interest rates. And so he showed, I think, strong independence from that. That's not to say that I think he did a good job overall, but I would say that he seemed to demonstrate that the Fed needed independence. Burton says on Fed independence, yeah, Jerome Powell was not an Arthur Burns in the end.

13:32You know, as for overall performance as a Fed chair, well, you're going to find quite the spread of feelings about that. Right. Some people will argue Powell's Fed managed the impossible. They soft landed the economy after inflation spiked during COVID. They got inflation down and somehow kept unemployment low. On the other side, there are people like Burton who feel like inflation shouldn't have spiked so badly during COVID to begin with, that the Fed did things that made it worse, including, and this is one of Burton's big issues, a bunch of quantitative easing where the Fed bought

14:05up things like mortgage-backed securities, introduced even more money into the system, and made buying a home even more difficult for lots of people. So, uh, to summarize, you ultimately feel like Powell created the independence to run the central bank the way that he wanted to run the central bank. You don't agree with how he ran the central bank, but you feel like the independence was there. I think so. The truth is, we're not really in a place to grade Powell's Fed today, because that part

14:38of the story, that will often take years to unfold. But we can, on his final day as Fed chair, finish etching the Jerome Powell entry into the Fed independence hall of infamy. Because what absolutely seems to be true is in 50 years, if an economics podcaster went looking for extraordinary moments in Fed independence history, there are now three. McChesney Martin, Arthur Burns, and Jerome Powell. And Powell's big moment, well, that is arguably even more dramatic than getting shoved against

15:11a wall by a president. After the break.

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Lael Brainard Interview

16:43Okay, there was one final person we wanted to talk to about Powell's term as Fed Chair. Was Jay Powell more a McChesney-Martin or more an Arthur Burns? Well, I would say that Trump's second term has really put Jerome Powell in a category of his own because the actions that have been taken have been really unprecedented. This is Lael Brainard, former member of the Fed Board of Governors. Now, we've talked a lot about the Fed Chair, but the Fed is a group, really.

17:17There's a board of seven people, including the Fed Chair, plus five heads of regional Feds. And what really happens is those 12 people go into a room, look at data, debate the direction of the economy, and then set monetary policy. Lael was one of those seven board members. She was nominated by Obama, and she was still there when Trump appointed Powell. So I was on the board for about nine years, and I was there during all of the first Trump term. Yeah, so you were there during the time we started paying attention to this

17:49because there were these little blips that seemed unusual. Do you remember internally feeling those things crop up as odd? So it was very clear that during the first term, President Trump wanted U.S. interest rates to be lowered by the Federal Reserve, and he was very vocal, very critical, and very personal. For this last chapter of our episode, we wanted to talk to Lael for a couple of reasons.

18:19Number one, there are simply not very many people who can tell you what it's like inside the Fed when the president starts to pressure the Fed. And number two, to ask what she'll be watching going forward, signs she'll be looking for that Fed independence is holding strong or starting to crumble. But let's start inside the Fed. Lael was there when Trump first started to tweet the stuff that we at Planet Money noticed, you know, how it was incredible, the Fed was considering another rate hike, and how the Fed better not make another mistake.

18:50Is there a policy in place where it's like, if the president tweets, don't show it to me, I don't want to see it, I don't want it to influence my decision? Is there anything like that in place back then? No, there's no policy. I think it is not unusual, and it's highly understandable why presidents might get frustrated with the Federal Reserve when their reelection really hinges on, you know, how consumers are feeling about the economy. So when that tweet goes out, you don't say like,

19:21la, la, la, I'm not listening, I'm not seeing this. That's not the approach? The approach is to simply carry on and just keep communicating with the public. Here is my objective that Congress gave me. Keep inflation low and stable, 2%. Keep the labor market robust, full employment. And here's the data and how I'm making the decision. Yeah, that's the Fed's dual mandate or dual objective, keeping inflation and unemployment low.

19:51And Lael says, as the president made it more and more clear in public that he wanted the Fed to do specific things, the Fed felt like it was more and more important to just show their work when they made decisions. Yeah, you know, the Fed is speaking to all of these audiences, the public, financial markets, Congress. And so ignoring the president and simply saying clearer than ever why they are making the choices that they are making, that was their way of showing all of those audiences that they were setting policy based on facts and data

20:22and not executive pressure. And really, Lael says, that was a general approach during the first Trump term. And it seemed to work. Under President Joe Biden, Lael actually became Powell's vice chair, then left that role to head up Biden's National Economic Council. She moved on from being inside the Fed. She was, of course, still paying attention to what her old Fed colleagues were up to just from the outside, which was why she, like the rest of us,

20:53had no inside information leading up to January 11th of this year. I think we all learned about it in the same way when we saw that extraordinary statement on the part of Chair Powell. Good evening. On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas. This is from a video released by the Fed. It's just Jerome Powell addressing the camera, dropping an absolute bomb that he was being investigated by the DOJ

21:26related to testimony he gave about cost overruns on a Fed construction project. And of all the super unusual things about this video, what still stands out to me is how Jerome Powell, a man famous for calmly Fed speaking his way through giant announcements, how he is shockingly straightforward about what he thinks is going on in this investigation. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public

21:57rather than following the preferences of the president. For Lael, when we look back at the Powell era, this is the moment. It's Powell's version of getting pushed against the wall by LBJ. I think it is the most striking moment where the chair of the Federal Reserve found it necessary to speak to the American people to note that he saw this as a real threat to the independence of the Federal Reserve. Have you talked to Chairman Powell at all during this extreme ramp up in pressure?

22:32I have not. I believe it's important to, as somebody who was formerly at the Federal Reserve, you know, to kind of give them all the space they need while they're navigating through a very complicated situation. Yes, complicated situation is perhaps an understatement. A criminal investigation into a Fed share is so beyond any of the historic case studies in Fed independence. And personally, it has not made me particularly optimistic about the future of this hugely important ideal.

23:06That's a big reason we wanted to talk to Lael, to hear what signs she is watching for whether Fed independence is crumbling or holding going forward. So let's start with this. The incoming Fed chair, nominated by Trump, is named Kevin Warsh. Like Lael, Kevin Warsh served on the Fed board. He was nominated by George W. Bush back in 2006. Now, Kevin and Lael did not overlap, but it does seem as if Warsh's time on the board means something to Lael.

23:38I think everybody who serves on the Federal Reserve Board takes very seriously this mandate to really stay focused on the dual objectives that Congress gives the Fed and is not swayed by political judgments. And so I would certainly give the incoming chair the benefit of the doubt. Are you optimistic about the term of the incoming chair? I am optimistic in the sense that it was extremely important that we saw the checks and balances

24:11reassert themselves. Ah, yes, the checks and balances reasserting themselves. A few things have happened in the last year that are making Lael optimistic and are worth going through one by one. All right. Cause for optimism, number one. Congress not messing around when it comes to Fed independence. What we've seen finally is that the Senate, which is responsible for confirming nominees to the Federal Reserve, has finally stood up and said,

24:43enough, we're not going to confirm the new chair until this criminal investigation is dropped. The criminal investigation of Jerome Powell. Republican Senator Tom Tillis specifically led this charge. And indeed, the DOJ announced they were closing the investigation. I mean, they did say they'd keep looking and would open a new investigation if they found anything wrong. But yes, technically, they have closed the Powell investigation because at least one Republican lawmaker drew a line. So I'll be watching how much Congress continues to defend the independence of the Fed on a bipartisan basis against presidents,

25:22even when they are a president of your own party. That's really important. Lael says there's more Congress could do. The 1913 law that created the Fed says a president can fire a Fed board member, but only for cause. It does not, however, define cause. Congress could pass legislation making clear what for cause means. Being corrupt, being negligent in your job responsibilities, just something more specific than just for cause. That kind of clarification would be extremely helpful.

25:55Because this has become an issue under Trump. Yeah. Last year, Trump attempted to fire the Biden-nominated Fed board member, Lisa Cook, for alleged mortgage fraud, which, too many people, seemed like an obviously spun-up excuse for a political attack on Cook. Cook sued. And this is another thing Lael is watching for, how the judicial branch handles the Cook case. So the lower courts have kept Cook on the Fed board. But, but, the case is now before the Supreme Court.

26:28I think it's not yet clear where the Supreme Court is headed on this, but there's plenty of opportunity for the Supreme Court to harden up in a way that strengthens the independence of the Federal Reserve, if that's what they decide. The Supreme Court has already heard oral arguments for the case, and listening to the justices' questions made Lael optimistic. But, this is a high-stakes decision to watch for. Because if the president can fire board members at will,

27:02Lael says there's not really an independent Fed anymore. Yes. I think we should all be extremely concerned. If the bar is lowered for the Federal Reserve for firing members of the board of the Federal Reserve the way that the Supreme Court has lowered the bar for other independent agencies, that would fundamentally alter the ability of the Federal Reserve to control inflation. And finally, we wanted to ask Lael about something that we've noticed as a possible sign of fractured independence.

Signs of Fractured Independence

27:36That would be dissent on the Fed board. Right. Lately, a strange thing has been happening when the Fed meets. They'll announce their decision. But basically, every time there is this one board member, Trump-nominated Stephen Moran, who openly dissents. Basically, he says, I disagree with this decision. Rates should be lowered. Now, people, including Lael, have said, well, this is probably the new norm. We may hear more dissenting voices from all over the political spectrum going forward, which would be pretty unheard of from our Fed.

28:13The Fed, in recent history at least, has tended to speak with one steadfast voice. And we asked Lael about this. So should people be worried about that? No. I think that dissent is very healthy. You're right that for many years, certainly when I was on the Federal Reserve Board, dissent was rare on monetary policy. And there was a real effort on the part of all members of the Monetary Policy Committee to come together in support of the chair.

28:43She even told us a story about this from when she was on the board back in 2015. Yeah. And basically, the situation was, Lael did not think it was time to raise rates. Some of her Fed colleagues disagreed. And the way the Fed worked back then, basically the way it has worked for the last few decades, is the board members, the regional heads, they went into their room, they talked it all out, said their piece, and eventually a decision was reached. They were going to raise rates. I would not have done that if I had chosen independently.

29:16But for me at that juncture, it was more important to support the chair and give the chair the ability to communicate clearly with the American public. Why now? What was the rationale here? Just because it makes it easier for the chair to explain. It's a united voice. It's a united voice. It's a single message. Absolutely. On the other hand, there are other central banks where dissent is the norm, like the Bank of England. And I think over time, both the public and financial markets have come to absorb those dissents and understand what they mean.

29:54So I think that's probably where we're headed in the next maybe few years. But I don't know that for sure. So if, when, you see stories about dissent, it might feel bad. But just remember, Lael says, not necessarily so. You know, I think generally, reporting this episode has made me more optimistic about the future of Fed independence than I was, I don't know, Erica, like a week ago. With, with, may I say, one major exception, a real downer of an idea to end on.

30:27But I would like to, if that's okay. Okay. Go for it. All right. We'll put uplifting music at the end, so it'll be fine. Yeah. Okay. So, you know, back in 2018, when we started to look for examples of presidents pressuring their Fed chairs, it was really just McChesney Martin and Burns. And, you know, when you go researching those cases, it's all black and white photos and scratchy phone calls. It all feels very distant. Like, the idea of a president overstepping seemed so archaic and rare. But today, Jerome Powell, he is just the eighth Fed chair in the Fed independence era, like after the Treasury Fed accord.

31:06And so when you run those numbers, it maybe felt like presidents pressuring Fed chairs was rare. But Jerome Powell now makes three of eight Fed chairs to face historic pressure from a president when the president is supposed to leave the Fed alone. So maybe this was the norm all along. And that 40 years of peace we just lived through, that will go down in history as the exception.

31:34Today's episode was produced by Sam Yellowhorse Kessler. It was edited by Jess Jang, fact-checked by Sierra Juarez, and engineered by Sina Lafredo and Robert Rodriguez. Our executive producer is Alex Goldmark. I'm Kenny Malone. I'm Erica Barris. This is NPR. Thanks for listening. This message comes from American Home Shield. An AHS home warranty helps protect your major systems and appliances, no matter how old. Do you have an unreliable AC or a leaky water heater?

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