Trump’s Battle With The Federal Reserve

0:07What's behind President Trump's ongoing battle with the Federal Reserve? That's the question on some analysts' minds as the White House proposes staff shakeups at the historically independent Central Bank. Trump has been attempting to fire Federal Reserve Governor Lisa Cook since August 25th. Cook was nominated by Joe Biden and confirmed by the Senate in 2022. The White House is attempting to remove her based on allegations that she committed mortgage fraud before joining the Fed. That's even though she hasn't been convicted or charged with any crime. On Tuesday night, a federal judge temporarily blocked the president from removing Lisa Cook from the Federal Reserve's Board of Governors.

0:45She'll continue to serve as she contests her dismissal. The Fed has operated independently since its inception more than a century ago. How did the Trump administration's proposed changes threaten that independence? and what effect could changes that the Fed have on the U.S. economy. We get into it after a short break. I'm Jen White. You're listening to the 1A Podcast. Stay with us. We've got a lot to get to.

1:13Joining us in studio is David Wessel. He's the director of the Hutchins Center on Fiscal and Monetary Policy and senior research fellow at the Brookings Institution. David, it's great to see you. Good to be with you. Also with us is Amara Amokwe, Federal Reserve and economy reporter at Bloomberg. Amara, welcome to the program. Thanks for having me. And Alison Morrow, senior writer for CNN Business. Alison, welcome back. Thanks so much. So I want to start with Lisa Cook. She was appointed, as we said, in 2022 by then-President Biden. She's one of seven members of the Fed's Board of Governors. Alison, under what authority is the president attempting to fire Cook?

1:51So I think it's important to remember that he is trying to use the authority of cause, which is a murky kind of broad legal use case about, you know, dereliction of duty. You know, you can fire a federal employee for cause. And he's trying to clearly gin something up against Lisa Cook. But I really want to underscore that I think when it comes to this attack on the Fed, there are a lot of red herrings out there about mortgage fraud and biases. But the thing to remember is that Trump really wants to have his control over the Fed, and that is the primary motivator for this attack. Now, Republican Senator Tom Tillis of North Carolina is a senior member of the Senate Banking Committee.

2:40He told reporters last week that he would not consider a nominee to replace Lisa Cook until the legality of her firing has been determined in court. And as we mentioned, Judge Gia M. Cobb of the U.S. District Court in D.C. yesterday ruled that there was not sufficient cause for her removal and she can continue at her post. What else did the judge say in that ruling, Allison? So it's important that she can continue and that there were some questions about cause would apply to something that happened before she joined the Federal Reserve. These mortgage documents date to 2021 and then she joined the Fed in 2022.

3:20So I think that's an important distinction that we'll see play out as this case works through the court. David, take us into the Board of Governors and the role they play in creating economic policy for the U.S. Well, the Federal Reserve essentially tries to steer the economy by moving interest rates. And interest rates, short-term interest rates, which ricochet through the economy, are set by a committee. And the committee is seven governors in Washington, including Governor Cook, who can keep her job for now. and the 12 presidents of the reserve banks out in the country, five of whom have a vote at any one meeting.

4:00And as you point out, the whole idea here is that Congress said if politicians set interest rates, they'll always tend to set them too low to make the economy go stronger now and more inflation later. So Congress said, as have most other governments around the world in advanced economies, that it's a better idea if we can insulate them from politics so they can take the long view. And that's what the Fed is supposed to do. The Senate Banking Committee held a hearing on Thursday to consider Trump nominee Stephen Myron for a vacant seat on the Fed's Board of Governors, while also maintaining his role as an economist at the White House.

4:39The committee is set to vote today on whether to advance the nomination on Myron. What should we know about Stephen Myron, Amira? So Stephen Myron is the current chair of the White House Council of Economic Advisors. So he is one of the top advisors to President Trump, and he is an ally of President Trump. Pretty much he has been in lockstep with President Trump on every economic issue from tariffs to this idea that the Federal Reserve should be lowering interest rates. And at his nomination hearing last week, he proposed something unusual, which is that if he is confirmed to serve on the Fed's Board of Governors, that he will take an unpaid leave of absence from his role at the White House.

5:17So essentially not fully stepping down from that role. And so that has just further, I think, heightened concerns about the pressure that President Trump and his allies are putting on the Fed for lower interest rates and putting on the Fed from several other angles as well, because an ally of President Trump looks very likely to join the board, and he's not going to step down officially from his other post. And it's just in line with the pressure that we have seen from President Trump this year, perpetually calling for lower interest rates, insulting Fed Chair Jerome Powell perpetually as well, and then also scrutinizing the Fed from other angles, whether that be, you know, the construction project over at their headquarters or, as we've been talking about, the attempt to fire Fed Governor Lisa Cook.

6:04It really is just a full-on pressure campaign from the Trump administration on the Fed. Well, David, I want you to lay out for us the typical protocol of remaining an employee of the White House while also serving as an independent governor on the Federal Reserve. Is there any precedent for this? Even if it's an unpaid leave from the White House, you're still on the books. I don't know of any precedent. There have been other members of the Council of Economic Advisors who've gone to the Fed. Both Ben Bernanke and Janet Yellen had those jobs at one time. But they left those jobs, and they were very clear that I am no longer an advisor or an ally to the president of the United States.

6:44I am charged with independently setting monetary policy to deliver on the Fed's mandate, which is full employment or maximum employment and price stability. Now, to be clear, Steve Myron says that's what he's going to do, but it is rather unusual, to say the least, that he still has this unpaid leave from the White House. And typically, what sorts of interactions does a president have with the Fed?

7:12Well, once upon a time, basically until Bill Clinton was president, the president and his aides often lectured the Fed about what to do. The famous incident is in the Nixon administration where Nixon pressured then Fed Chairman Arthur Burns to keep rates low in order to help Nixon's reelection. That caused a lot of inflation and they all still talk about that at the Fed as if it was the original sin. But since Bill Clinton, administrations have basically just counseled the Fed in private and not blasted them in public as the Trump administration does. There is obviously communication that would be crazy not to.

7:51The Treasury Secretary, the chair of the Council of Economic Advisers often meet with the Fed chair and other members of the Federal Reserve Board. After all, they all are in the interest of the U.S. public. What's unusual here is this just strident, ugly, persistent attempt to lecture the Fed about what they're doing wrong. And as Amara said, to like create a situation where Trump appointees would have a majority of the seven-member board. And we should not forget that President Trump has spent months attacking Federal Reserve Board Chairman Jerome Powell, writing on social media in April that, quote, termination cannot come fast enough.

8:30In July, he said he will not fire Powell, whose term ends in January 2028. But those attacks haven't stopped. Late last month, Trump claimed Powell was hurting the housing industry by not slashing interest rates. Amira, what's behind President Trump's ire towards Powell in particular? Well, he wants lower interest rates, and the Fed has been on hold this entire year. They cut interest rates three times at the end of 2024, but so far in 2025, they have not lowered interest rates. And the primary reason for that is that Fed officials broadly have been on guard about the potential for President Trump's tariffs to drive persistent inflation.

9:09So you hear Chair Powell and several of the other officials say quite often that it's sort of their base case that the effects from tariffs will be short-lived, that they will result in sort of a one-time increase in the prices that we pay for the things that we want and need. But they have been cautious about this idea that perhaps that will not be the case, that the tariffs will kind of cause this persistent inflation problem, potentially cause people's expectations for where inflation is going to go to rise. And so they have kept interest rates on hold as they wait to see sort of how these tariffs policies shake out and how they affect prices and how they affect the broader economic picture.

9:49And that has really angered President Trump. He's talked about primarily that where the Fed is holding interest rates, the level where the Fed is holding interest rates is driving up the government's borrowing costs. He's also more recently talked about the effects of Fed policy on mortgage rates. And so he really wants lower interest rates as he sort of implements all these broad economic changes. He really wants interest rates to come down so that his economic policies work, really. And so you've seen him really apply that pressure on the Fed and really push for interest rates constantly. Allison, what kind of economy did President Trump inherit from President Biden?

10:29Well, initially, it looked like a very strong economy. And I think arguably it still was a very strong economy with low unemployment, though we did just get BLS numbers revising the last 12 months that showed that the employment situation was a lot weaker than we thought at the time. So that's complicating the read on Trump's inherited economy now. We'll talk more about jobs numbers after the break. Stay with us. Back with more in a moment.

11:00Let's get back to the conversation. Now, the Senate Banking Committee held a hearing today about Stephen Myron and his possible addition to the Fed board. David, we have an update on that. That's right. So the president has nominated Steve Myron for a term that runs through January. because another governor resigned. And the Senate Banking Committee on a partisan vote this morning voted 13 to 11, Republicans voting to confirm him, Democrats against, and that'll send it to the Senate floor. You know, the Senate doesn't usually move very quickly, but they are really speeding this through. And I think that's because the president wants Steve Myron at the table when the Fed meets next week, Tuesday and Wednesday, to set interest rates.

11:41And let's go to this email we got from Jay, who says, I've taught economics at universities and have been a U.S. Treasury and Commerce Department economist for decades. While Trump inherited a sound economy, he has weakened it with his restrictive tariff and immigration policies. As such, he puts the Fed in a very difficult position. If they cut interest rates to buoy the weak labor market, this should boost inflation. Further, he's threatening the Fed's independence, and it's disastrous, as it could eventually result in runaway inflation. The Fed is the best entity we have to control inflation, and he aims to destroy that.

12:14I'd love to hear each of your responses to what Jay says there. Allison, I'll come to you first. Sure. I mean, absolutely. When Trump came back into office, the economy was in a good trajectory. Inflation had been coming down for several quarters. The employment situation was surprisingly strong. And, you know, even with the revisions, it's still a relatively strong, not on the verge of a recession kind of economy. And I think it's really to the credit of businesses so far that they've absorbed kind of all of the tariff uncertainty into their bottom lines to avoid raising prices on people. And so the economy, a lot of people are not feeling necessarily the impact of Trump's policy decisions just yet.

12:58Like maybe your coffee costs the same, your breakfast, you know, your grocery bills aren't going up sky high like they were. But that stuff is all because a lot of corporations have been reluctant to raise prices. And so they are absorbing the cost of the tariffs on the back end. But, you know, talk to executives and analysts across the board. That is not a sustainable model. And so, you know, all of the uncertainty that Trump has injected in with tariffs, it can only be held off for so long. Amira, your thoughts? Yeah, I think that's right. I think the totality of the changes that we're seeing in economic policy from the Trump administration now has put the Fed in kind of a tough position.

13:42We've seen Chair Powell and other Fed officials start to talk more about the risks that are becoming more evident in the labor market. And so that would suggest that they should be lowering rates and trying to provide some support for the economy here. But at the same time, even before we had tariffs, inflation had not yet gotten down to the Fed's 2 percent target. And now we have tariffs and we have Fed officials concerned that the tariffs may make it harder for them to get inflation down to that 2 % target. And so that would call for the Fed to kind of leave rates where they are, which is at a level that is considered to be somewhat of a restraint on the economy.

14:20And so you basically have the economic picture pulling them in opposite directions. And that is why they've been on hold. And that's why it makes their interest rate calculations kind of difficult. Now, recently, Fed Chair Powell opened the door to an interest rate cut at the meeting next week. Investors widely expect that the Fed will cut interest rates next week. But then the question becomes, how do they navigate this very sort of confusing situation? Do they continue to do interest rate cuts at subsequent meetings? How fast do they cut interest rates? It really has made the Fed's policy calculus very complicated here.

14:55David, your thoughts? I basically agree with the letter writer. I just want to challenge Allison a little bit. So coffee prices are up almost 15 % year over year. So we are beginning to see the effect of the tariffs. Look, the Fed has two goals. One is maximum employment and one is price stability. And when everything's pointing in the same direction, you or I could set interest rates, right? This is where judgment really matters. And they have to decide which goal are they further away from. And until now, they've been able to say, look, inflation is coming down gradually. We're a little worried about what the tariffs will do.

15:35The job market is very strong. We're going to sit tight. Well, the new numbers on the job market over the last couple of weeks, especially last Friday's numbers, suggest that now the job market is beginning to weaken. And so they have to decide which goal are they further from. And that's the balancing act. And it looks like they are deciding that, okay, we wish inflation were lower. We're still worried about inflation, but we're more worried about the job market, which is why they're probably going to cut next week, as Amara said. And the markets expect them to cut twice more this year before the year ends.

16:11We got this email from Elizabeth who says, I don't understand how people keep only relying on the stock market as a measure for economic health. All of my friends are worried about another recession and are doing everything they can to save right now. My company will be going through its third round of layoffs next month within a six-month period, and many of my friends have the same issue. You know, this is something we saw during President Biden's administration where there were the numbers and the statistics and what that said about the economy. And then there was the way people were experiencing the economy.

16:48And I don't know that any of us can't point to people who have either been laid off or are currently looking for employment and can't find jobs, who are complaining about the price of groceries or their electricity bills. And so, I mean, David, when we talk about how Americans are feeling in this moment, what are you hearing? All right. So there's two different issues here. One is the stock market does not tell us very much about the economy. The headlines make people feel better and people who have stock get richer. So that's good for them. But nobody seriously looks at the stock market as the only way to measure the economy.

17:23It's really important to distinguish between the overall picture. So we can look at the numbers about economic growth, unemployment rate. But nobody is looking at the whole picture. They're looking at their own circumstance. And we've been through a period of time where inequality has been increasing. So there are people who are doing better and there are people who are not doing better. And we're hearing a lot from that second group. Secondly, people have a way of measuring the economy that's very different than what economists do. When I think about inflation, I don't really think about 2.6 % versus 3.2%.

18:01I think about that big sign at the gas station, the biggest price in the economy, or what I pay if I go to Starbucks. So people think about those things. And then the second thing is that we all, and this is particularly true in Washington, have friends who have lost their job because of the government cutbacks. And also there are a lot of people around the country who have sons or daughters or grandsons or granddaughters who are finding the job market kind of unfriendly. And so my job is secure, but my kid who just graduated from college is having trouble getting a decent job. I'm going to be really worried.

18:38Yeah. We got this email from Ken who says, I heard another discussion of this that mentioned the rate Trump wants lowered is a short-term rate and that it wouldn't necessarily automatically translate to lower mortgage rates. Because mortgage rates are long-term rates, banks would still be looking at other considerations. This means Trump's stated goal might sound good to the layperson but is not actually valid. May your guess speak to that. David? Yeah, it's a good point. Actually, so mortgage rates basically depend on what happens in the long-term markets. Seven - and ten-year treasury markets are the benchmark.

19:12In fact, mortgage rates have come down recently. And mortgage rates, long-term rates, are a function of a couple things. One is what the markets expect the Fed to do. Secondly, what the markets expect economic growth and inflation to be. So the reason mortgage rates are coming down is in part due to the Fed's lowering short-term rates, but it's also due to the fact that the markets are thinking that the economy is pretty soft. In fact, we don't really know, but it's possible, I'm not saying it's likely or certain, that we'll look back at this moment and say these jobs numbers suggest that we're at the beginning of a recession.

19:51People have been worried about this for some time. Morgan Stanley, for instance, a big investment bank, continues to predict a recession. But the issue here is if the markets think the Fed has been captured by Trump and the Fed will keep interest rates lower than they should be to contain inflation, then long-term interest rates are likely to go up and that will mean higher mortgage rates. I'm curious about the ripple effects of this instability beyond the U.S. And Allison, I'll come to you first on that because, you know, the U.S. is considered the most or one of the most powerful economies in the world.

20:33So if the U.S. is destabilized, what happens globally? It's a great point and it's a huge issue. I mean, of course, the U.S. is the gold standard in terms of the economy. If you're looking for a safe investment vehicle as a foreign investor, that is where you park your money. And that is, you know, the backbone of the global financial system is all in the stability of the United States. So it kind of all depends on how big of a shock the markets respond to, say, the erosion of Federal Reserve independence. or if the dollar were to fall even more precipitously than it has, how quickly and how big of an impact that would be, I think, is hard to predict.

21:24But I think it's difficult to overstate that the chain reaction could be cataclysmic. And, you know, we often point to when we talk about the erosion of Federal Reserve independence, We look at countries like Turkey, where there's an autocrat controlling interest rates, and it's bad news for the Turkish economy. They've got massive inflation. The value of the currency has cratered. But the Turkish economy is not the United States economy, and it's not going to have the same global impact. We don't really know what happens, to be frank, when the United States loses that credibility. Amir, are your thoughts?

22:04Yeah, I agree with that wholeheartedly. And you've actually seen central bankers from around the world really kind of rally around Chair Powell. I was at the Jackson Hole Symposium in Wyoming a couple of weeks ago, and there were central bankers from other parts of the world there, and in addition to many in the economist community. And when Chair Powell went to deliver his speech, he got a huge standing ovation. He's gotten standing ovations at other gatherings of world leaders and central bank leaders from around the world earlier this year. And so you really do see a recognition of what is happening in the U.S.

22:37with President Trump's pressure on the Fed. And you really do see a recognition by other leaders around the world that this is a serious issue. And you see them kind of rallying around Chair Powell and supporting Chair Powell and talking about the independence of the central bank in the U.S. because they do understand that if that independence is compromised, it does have potential implications for their ability to do their jobs at their central banks in their home countries and also the global economy. Let's take a quick pause here. Still to come, from the fight over the Fed to why it's sweeping tariffs, how are Americans viewing Donald Trump's economy?

23:11And what's at risk if the Federal Reserve's independence is compromised? All that just ahead.

23:21Back to our discussion about the Federal Reserve. Last week's Economist YouGov poll found that the president held a net negative 15 percent approval rating on his handling of jobs and the economy and a net negative 30 percent on his handling of inflation. According to that same poll, 45 percent of surveyed adults say they trust the Federal Reserve Board of Governors to handle the economy compared to 26 percent who say they trust President Trump. David, what does this polling indicate to you about how people are feeling about the economy right now? Well, I think people are nervous, and they're right to be nervous.

23:59If it were just what the president is doing to the Federal Reserve, that would be bad enough. But it seems like we're living in an environment of almost chaos where the president is challenging almost every norm. He's challenging Congress's power of the purse. He's not spending the money that Congress has appropriated. He's fired the head of the Bureau of Labor Statistics because he didn't like the numbers that were coming out. It's kind of like firing the scorekeeper at a ballgame. Your team's losing, so you fire the scorekeeper. But that doesn't really change the outcome. So I think that people are correct to be uneasy.

24:38And I think it's particularly worrisome that although the stock market is doing great, there are some signs that business is a little uneasy. and that means a little less investment, a little less hiring. So – and I think there's been a deterioration of trust of Americans in almost all our institutions, in the press, in Congress, and the Fed is not exempt. The Supreme Court is another one. So I think that's a big problem we have and it makes it hard for anybody responsible to rise above the noise and say, let me tell you the truth here, because everybody challenges, no matter what you say, including the president, as if somehow there's some alternate set of facts.