Why is Trump targeting America's most powerful bank?

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1:37BBC Sounds, music, radio, podcasts. Donald Trump has the most powerful economic institution in the United States, heck, maybe even the world in his sights. America's central bank, the Federal Reserve. He's talked about wanting to get rid of Jerome Powell, the head of the Federal Reserve said he would do that in a heartbeat. I don't think he's doing the job. He's too late, always too late, a little slow, and I'm not happy with him. I let him know it. And if I want him out, he'll be out of there real fast, believe me. Okay, so that was back in April. Powell is still obviously around, but he has escalated this fight with the Federal Reserve by trying to fire one of the bank's governors, Lisa Cook.

2:23Now, what happens if Donald Trump is successful in taking over the Federal Observe and putting all this new pressure on it? What would it mean for the American economy? What would it mean for the world's economy? And we've talked a lot about Donald Trump pushing the limits of presidential power. Would this be a fight where he finally hits that wall? Welcome to AmeriCast. AmeriCast. AmeriCast from BBC News. You're gambling with the lives of millions of people. You're gambling with World War III. President Trump's message is very simple. We are done being taken advantage of. Mr. President, in the name of our God, have mercy upon the people.

3:02We're scared now. Are you supportive of these onesies? I'm supportive of vaccines. What is happening? Like, this is not America. This is a terrible nightmare. This is what victory feels like. Yeah!

3:25Hello, it's Anthony here in the Washington Bureau of BBC News. And it's Sumi, also here in the Washington Bureau of BBC News, sitting alongside Anthony. Welcome back, Sumi. It's good to have you here. Thank you. I love joining this pod, especially when you're on where I get to hear your, you know, your library of knowledge on U.S. politics. All right. Well, it's great to have you back on, Sumi. And this is a really interesting topic. And we're going to be chatting with an expert in the field later, someone who could really give us some insight on what it means to the American economy, the Federal Reserve, and what Donald Trump might be planning and the changes he might be planning, the designs he has on the Fed.

4:02And that's Jillian Tett, who was editor at large of the Financial Times US. And now she's a Financial Times columnist and head of King's College, Cambridge. But before we speak to Jillian, let's lay out some of the basics about the Federal Reserve, shall we? You start us off here and give us some of your knowledge. What is the Federal Reserve and what does it do? Yeah, it is the central bank of the U.S. and the most powerful economic institution of the country and possibly the world, because we know that other central banks in other countries and the European Central Bank often watch what the Federal Reserve does here.

4:32But it is responsible for a few things like regulating banks. I mean, if you think about banking crisis, the Federal Reserve plays a big role there. And also managing the monetary system. And a big part of that is price stability. And so making sure that prices are not fluctuating up and down too much. And inflation is a big part of that. So one of the things we look to the Federal Reserve often on is interest rates. And obviously, that's a big topic of what we're looking at today. But, you know, the Federal Reserve has a rate, has a benchmark interest rate around 2%. That's where it thinks that inflation should be for a good, healthy economy, not too hot, not too cold.

5:11And all of that is really important if you think about what interest rates do in our country. You know, if you want to buy a house or a car or if you're a business and you want to borrow money, all of this is really central to the U.S. economy. So the role that the Federal Reserve, the central bank plays in all of that really is critical. Yeah. I mean, if you think about it, the Federal Reserve has one big lever that they can use to control the United States economy. It's the one thing that they can really do to either add fuel to the fire of American economic expansion or to start paring things back if they're worried that the economy is overheating.

5:45And that's the federal funds rate, which, as you mentioned, is the interest rate that the banks use to loan each other money. It's not directly the rate that you'd say pay for a home mortgage or an auto loan or interest on your credit card. But it is kind of behind the scenes, the thing that sets the trajectory for those kind of things. Yeah. And, you know, it's not a nameless, faceless place, the Federal Reserve. There are people, of course, who run the Federal Reserve. And so there is a chair of the Federal Reserve and a board of governors and a larger organization as well. And of course, there are hundreds of people who work at the Federal Reserve researching economic policy and advising the board of governors and the chair as well.

6:25But yeah, I mean, it really is at the moment, you know, the chair, Jerome Powell, Jay Powell, as he's known, is the one who's gotten a lot of attention of late. But he is the current chair of the Federal Reserve. And the Federal Reserve is a quasi independent governmental agency. So it's not directly part of, say, the Department of Treasury. It's independent of that. The president does pick those seven governors, but they serve 14-year terms, which is quite a long period of time for American office holding for these sorts of positions. And they're appointed kind of on a rotating basis. So every two years, you get a new term that's up.

7:03The president picks those people, and then the Senate confirms it. So both branches of government have a little bit of a say in it. Actually, the Federal Reserve isn't even in the U.S. Constitution. It's not a constitutionally created body. The American Central Bank was something that during the 19th century and the early American history, politicians tried to do on several occasions. And actually, the first American Central Bank was killed by Andrew Jackson, who is a president Donald Trump likes to admire in the early 19th century. It came back again. And this is kind of the third incarnation of it.

7:37It's been around for about 100 years. But obviously, there are political concerns about what an American bank, central bank does, what American Federal Reserve does. It does create political conflicts, as we're seeing right now with Donald Trump becoming so highly critical of what the Federal Reserve is doing. And the people who are running it, Jay Powell in particular, and Lisa Cook, this governor who Donald Trump is trying to fire at least. So maybe we should get into why Donald Trump doesn't like what the Federal Reserve is doing right now. Yeah. So he wants to see interest rates lowered. He has been saying this from day one of his second term, hasn't he, that he wants to see interest rates cut because he wants to see people going out, obviously, and, you know, buying those cars and buying those houses.

8:25And he believes that will jumpstart or boost the economy even more. And he says, you know, we have the hottest economy in the world. He wants to ensure that the U.S. economy stays that way. And he's accused Jerome Powell of basically politicizing decisions on interest rates, saying that he doesn't want to cut interest rates because, you know, he's, well, he's called him many names, hasn't he? Stupid and all the rest. Yeah, let's listen to some of the insults that Trump has lobbed at Powell recently. We call him Jerome Too Late Powell. He's an average mentally person, low IQ for what he does, OK?

8:58People aren't able to buy a house because this guy is a numbskull. He keeps the rates too high. And probably doing it for political reasons. The only time I remember him cutting rates. I mean, he cut the rates just before the election to try and help Kamala or whoever he was trying to help. He probably didn't know. You talk to the guy, it's like talking to nothing. It's like talking to a chair. No personality, no high intelligence, no nothing. I'm counting the insults there. Low IQ, you know, no high intelligence, like talking to a chair, no personality. He clearly, you know, we should say Donald Trump appointed Jerome Powell.

9:37Yeah, that's kind of the irony, right? He reappointed him to the chair of the Federal Reserve and has since turned on him in a big way. And it's clear that this Donald Trump doesn't like him, doesn't like what he's doing. And it's becoming very personal. And we should say what Jerome Powell and the Federal Reserve have said in defense of not having cut interest rates until now, which is they fear that inflation is still a little bit too high. Again, I mentioned earlier that benchmark rate of 2%. Inflation has hovered around 2.7 % in this country around there so far. And part of the reason that Jerome Powell and some of the governors have had their reservations about lowering interest rates are also the impact of Donald Trump's tariffs.

10:20They believe that that will lead again to higher prices. And the concern is lowering interest rates and, you know, having people run out and buy houses and buy cars and all the rest could then lead to more inflation once again. Right. And as you say, Jerome Powell and the Federal Reserve governors, they adamantly deny that any of their decisions are made based on politics. That's the reason why Congress set up the Federal Reserve insulated from the direct appointment of the president because they didn't want presidents to be able to pressure the central bank, which has all of this power of the economy for for political gain.

10:58Because, yeah, if you get it close to an election, you cut interest rates that actually might help a candidate running for office. Or if you dial it back, that might hurt a candidate running for office because it does have a direct impact on economic growth. Now, Donald Trump taking aim at Jay Powell personally in those insults, also trying, it seems, to find a reason maybe to fire Jay Powell, even though his term ends next year. And that led to a very public clash recently at the Federal Reserve because Donald Trump and some other conservatives had been suggesting that maybe Powell had been spending too much money renovating this big building that sits on Constitution Avenue just a few blocks away from the White House.

11:39Now, here's the exchange that those two men had at that time. It looks like it's about 3.1 billion. It went up a little bit or a lot. So the 2.7 is now 3.1. I'm not aware of that. Yeah, it just came out. Yeah, I haven't heard that from anybody at the Fed. Yeah, it just came out.

12:03Our notes had about 3.1 as well. 3.1, 3.2. This came from us? Yes. I don't know who does that. You're including the Martin renovation. That's our entire capital. You just added in a third building is what that is. That's a third building. It's a building that's being built. No, it's been it was built five years ago. We finished Martin five years ago. It's part of the overall. So it just shows the clash between the two men. It was an awkward moment. And also the apparent attempt by this administration to look for an excuse, maybe to get rid of Powell. They haven't, of course, but they have attempted to fire.

12:44Donald Trump has attempted to fire Lisa Cook, who is one of these Fed governors for different reasons, saying that she fraudulently attempted to claim two primary residences in home applications, home loan applications. So it does seem like there is a theme here that they are trying to find dirt on federal governors to find people to replace them with who will be friendlier to Donald Trump. Yeah, we should say in the case of Jerome Powell, I mean, these are two men, President Trump and Jerome Powell, who are just very different personalities. I mean, Jerome Powell, as you heard in that clip, is not particularly loquacious.

13:17He's not showy. And President Trump, you know, he has a very different vision of how he holds press conferences, for example. So to see that clash was really fascinating because very few people would correct President Trump in his presence like that with the cameras running. As for Lisa Cook, I mean, she and her lawyers deny any wrongdoing on mortgage fraud. And she's a really interesting person. I mean, she's the first black woman to serve as a governor on the board at the Federal Reserve. She also has, you know, a fascinating background. She grew up in a small town in Georgia, and she and her sister were the first or among the first in her in her town to desegregate schools.

13:56She was beaten up in school and still she says she still has a scar, you know, above her eyebrow, I believe, from from that time. And she went on to have a very successful career in economics. And she was appointed by Joe Biden and confirmed under Joe Biden and has taken now the seat on the board. And as you said, these are 14 year terms. And the idea of the independence of the Federal Reserve and these governors being appointed for 14 years is that no matter who's in office, no matter which way the political winds blow here in Washington, they have monetary policy and the health of the U.S. economy in mind, at least theoretically.

14:34That's what it's supposed to intend. All right. So I think we have laid the groundwork for a conversation now with Jillian Tett. As I mentioned, she's here. She is the economics columnist at the Financial Times and head of King's College at Cambridge. Hello, Jillian. Great to have you on with us. It's great to be with you. All right. Why don't you tell us a bit about whether Donald Trump can fire Jerome Powell? Can he fire Lisa Cook? Is this something that he has the power to do first and foremost? Well, the question of whether he has the power to fire the Federal Reserve governor or other members of the board really is pretty critical right now.

15:12Because on the one hand, you have the White House that says absolutely, yes, the president can do whatever they want. That's the nature of being the president. But you also have people on the other side who argue passionately that the Federal Reserve's independence is enshrined in law. And essentially, it's up to Congress to decide whether to remove that or not. and what we know amid all this swirl of allegations and legal battles is that this will almost certainly end up in the Supreme Court and be a huge test not just of President Trump's vision of how he wants to run the government but also a test of in many ways a constitution and the role of Congress and the core question of whether it's actually a good idea to have an independent Federal Reserve or not.

15:57Right the the court has said in the past that presidents can remove heads of quasi-independent agencies, but they did kind of carve out an exception for the Federal Reserve. They didn't decide it directly, but they left open the possibility that maybe Donald Trump can't do this, right? I guess it all kind of comes down to what is cause for firing, grounds for firing, and how you define it and who defines it. I mean, is that what the court is fundamentally, if this ends up in the Supreme Court, going to look at? Well, there's a micro question and a macro question. The micro question, the immediate micro question is, did Lisa Cook actually, in some way, obfuscate in her mortgage applications that she made before she became a governor?

16:39Is that actually a favorable offense or not? She obviously says absolutely not. And there are many people who think she's being targeted unfairly. However, the courts will need to decide whether or not she did actually contravene Fed rules. The macro question, though, is does a sitting president have the right to fire the members of the Federal Reserve Board or not. Now, it appears that under the 1913 founding charter, that in fact, the Fed does have a lot of independence. It does appear that it's really up to Congress to decide what is going to happen or not. But Congress has essentially been asleep at the wheel.

17:16So the fact that Lisa Cook has filed this lawsuit against the president, against the White House, is really going to take this issue to the Supreme Court in the end, because what's very clear is the Fed has said it will abide by whatever the law courts decide, but we simply don't know what they will decide. And the one other thing to do is to separate out in your mind, which is very important, two aspects of what the Fed does. On the one hand, it does financial regulation. On the other hand, it looks after monetary policy. Now, on the financial regulation side of the equation, the Fed's actually in much weaker ground.

17:51And they have essentially already rolled over to a large degree in the face of the White House. And given, if you like, responsibility for financial regulation back to the White House and Trump's team, this is really about monetary policy. Does a president have the right to dictate which way monetary policy is going or not? We did also get a question on this from one of our AmeriCasters, one of our loyal listeners, Ali in Cornwall, sent us a question over WhatsApp. Ali They ask, there's a big deal being made over the independence of the Federal Reserve. But if Trump can just fire someone he doesn't like and appoint yes people, then this surely becomes a farce.

18:30So, Jillian, I guess to that question, you know, what precedent would this set if Donald Trump is successful? Well, we don't have a lot of precedents for this. Back in the days of Paul Volcker, he at one stage was essentially approached by a president and asked to weaken monetary policy or lower rates. It was Richard Nixon, and he refused. During Trump's first term, Wilbur Ross, the then Commerce Secretary, was charged with calling up Chairman Powell and telling him that President Trump wanted him to cut rates. But again, Powell just ignored that and carried on as he planned before. So we don't have a lot of examples where this has actually happened before in a major Western economy.

19:15What is clear, though, is that you're seeing rising alarm amongst investors and economists about the implications of the president having control of monetary policy. because the critical thing to understand is that one of the biggest imperatives driving President Trump today is a concern about the exploding debt and deficit. He wants lower rates because he wants to reduce the amount of money that the U.S. has to spend each year on servicing debt interest payments. That's an absolutely overwhelming imperative shaping the White House right now. However, if you end up running monetary policy for the benefit of debt management, that's what economists call fiscal dominance, then essentially you stop paying attention to the other issues that investors care about, like inflation risks.

20:07And if it looks as if a Fed, whether or not it's technically independent or basically operating under Trump's behest, if it looks like the Fed is not going to worry about inflation going forward, then you're likely to see investors starting to get really concerned about buying long-term government bonds. Right. We talked about the one big lever that the Federal Reserve has to set these interest rates, the Fed funds rate. But I guess if you're moving the lever up and down willy-nilly and you're doing it in a way that isn't controlled and rational, then it won't matter what level you set it at. It's going to be the market that ultimately determines whether the United States is trustworthy or not.

20:45Does that seem fair? Absolutely. In the end of the day, although everyone's looking to law courts to decide whether the Fed is independent or not, I suspect that it's going to be the court of public opinion amongst international investors that really shapes what the White House does next or not. And the reason is that US Treasury Secretary Scott Besant was himself a hedge fund trader himself for many years. He knows all about how markets can overwhelm governments. In fact, he was part of the team with George Soros that essentially enabled Soros to beat the UK government during the so-called Black Wednesday all those years ago.

21:22So he knows very, very clearly that if the White House does things that cause it to lose the confidence of investors around the world, you will see long-term rates shoot up. And he knows the cost of that. So the game right now is, can they actually bully the Fed into lowering short-term rates without pushing up long-term rates in a way that's essentially going to be an act of self-sabotage as far as the White House is concerned. Now, one of the things you hear from Trump's folks is that, well, other central banks have already cut rates. The European Central Bank has done so. It's Jerome Powell, who's too slow, too late.

21:57And that's what they're complaining about is that, well, inflation has gone down and they just haven't been quick enough to lower the rates down to a more reasonable level from where they were when they jacked them up because inflation had been so high. I mean, is that a fair characterization? Well, in fact, Trump supporters are absolutely right that other banks have indeed cut. The big difference, though, of course, is that their economies have not been roaring ahead in the way that the American economy have been roaring ahead for the last 18 months. And although there are signs that growth is indeed slowing down quite sharply at the moment, this is still an economy which is growing pretty fast.

22:34And yes, there are signs the labour market is softening, but we're talking about an unemployment rate that's extraordinarily low by the standards of the last few decades. So if you're coming into this situation cold and not knowing any of the politics around what's going on, what you would say is why on earth is anyone even talking about cutting rates right now? Because the economic fundamentals probably don't justify it, least of all when you've got the stock market hitting new highs almost every other day. However, the reality is, of course, that politics do matter enormously right now. And so the problem for the Fed is trying to thread the needle between, on the one hand, sticking to its belief that it has to focus on economic fundamentals, but also realizing that it doesn't want to look as if it's being bullied politically, because it wants to keep credibility, and almost becoming too recalcitant in the face of the US pressure, or rather the White House pressure.

23:29Gillian, I'm curious to hear what you make of President Trump's approach to monetary policy, to the economy here in the US in general, which has been far more interventionist than a traditional Republican, perhaps. What do you think of that? Well, you have to separate out what President Trump's vision of the economy is and what the advisors around him. So Trump himself, I don't think, has a wildly sophisticated sense of the economy, but he believes very strongly in animal spirits, to cite John Maynard Keynes, the economist, who in fact was at the college that I now oversee at Cambridge, King's College.

24:05And Trump wants to create a mood of great excitement and optimism. He thinks that will help people go out and invest. He wants to bully his way into basically squashing the naysayers and the Cassandras. And he's been calling for, in fact, interest rates to be set at 1%. percent instead of 4.25 or 4.5 percent, because he says that's going to basically create this explosion of optimism. The advisors around him, like Scott Besson and others, appear to be very much hoping that the way to deal with this extraordinarily high debt level is to spark enough momentum in the economy that America can grow its way out of debt.

24:46And that coupled with the income from the tariffs, and they hope some reduction in interest rates will enable them to essentially pay down the deficit going forward. So they're trying to essentially create enough momentum to ensure that in a psychological sense, the economy is poised to grow. And the other key thing to understand is that they're also trying to suck growth out from the rest of the world and bring it all to America. So the demand that essentially other companies around the world bring their operations to America, invest in America, that America, if you like, hogs a lot of the global growth right now, is again playing into their vision of how to create an American economy.