What happens if the Fed loses its independence?

0:00Can you guess who President Trump is talking about here? He's strong. He's committed. He's smart. And if he is confirmed by the Senate, Jay will put his considerable talents and experience to work leading our nation's independent central bank. That is the president in 2017 praising Jerome Powell, his nominee for Federal Reserve chairman. What does Trump say about Powell these days? Well, here he is last November at an investment event. He's got some real mental problems. No, here's something wrong with him. It's a little different. After their friendly start, the chairman and president had a rocky relationship during Trump's first term.

0:40Things got worse as the COVID-19 pandemic wreaked havoc on the economy and inflation skyrocketed. In 2024, when Trump ran for re-election, he said he wouldn't appoint Powell for another 10-year term. And things have only gotten worse since Trump was sworn in last January. He's called Powell a political hack, among other things. But we have a guy that's just a stubborn mule and a stupid person that is making a big mistake. And the president has tried to strong arm Powell into drastically cutting interest rates. Trump has also closely scrutinized building reservations the Fed authorized that went over budget.

1:18The Fed is supposed to sit there and say where interest rates are going and a couple of other very easy things to do. And he spent two and a half billion dollars. I think he's, you know, I think he's got some problems. Through it all, Powell has stayed mostly measured and diplomatic. Take the summer when President Trump toured Federal Reserve buildings being renovated and seemed to be building a case to fire Powell over those renovations' cost overruns. You're including the Martin renovation. You just added in a third building is what that is. That's a third building. It's a building that's being built.

1:52It was built five years ago. We finished Martin five years ago. It's part of the overall work. Over the weekend, that changed. NPR chief economics correspondent Scott Horsley explained it on our sister podcast up first. The Federal Reserve says it was served with grand jury subpoenas on Friday, seeking information about the multi-billion dollar makeover of the Fed's headquarter building here in Washington and testimony that Fed Chairman Jerome Powell gave the Senate Banking Committee about that project back in June. The subpoenas prompted Powell to release an uncharacteristically strong statement.

2:25The 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, rather than following the preferences of the president. Trump has not been shy about trying to influence the Fed. And while he told NBC News he doesn't know anything about the Department of Justice investigations, members of Congress, including some Republicans, say they're concerned the independence of the Federal Reserve is now at risk. Consider this. The Federal Reserve decides monetary policy across the United States. Its decisions help shape the global economy.

3:01What happens if that independence is threatened?

3:14From NPR, I'm Juana Summers.

3:26It's Consider This from NPR. Adam Posen is president of the Peterson Institute for International Economics. He studied central bank independence for a very long time. He says governments should treat monetary policymakers like surgeons or airline pilots. The patient or passenger must let them work and evaluate their performance based on the results. I asked him for his first reaction to the news of the Department of Justice's investigation. The president or the administration is trying to intimidate a hardworking bureaucrat just trying to do the right thing. And as the chair accurately said, it's a power gambit by the president and his team to force the Fed to set interest rates and set monetary policy in ways contrary to their judgment of what's best.

4:14I'll note that President Trump has said that he had no knowledge of the investigation. But to your mind, do these DOJ subpoenas endanger the independence of the Federal Reserve? I think they do. If you weaponize the Department of Justice on people who you happen to disagree with, it's contrary to the rule of law and it leads to bad outcomes. And even if the court cases don't hold up, it means that people get harassed, get intimidated. specifically with respect to the Fed and independence, there is this tendency to have it as this abstract thing. Independence isn't abstract here. Independence, in this case, is what we call operational independence.

4:54So it's like you have an airline pilot or a surgeon, you don't want the patient or their family or the passenger on the plane telling them how to run the plane or do the operation while they're doing it. You want them to be accountable. You want to say, you get me from here to there. You take out my damaged appendix. And you want there to be accountable if they mess up after the fact. You can sue for malpractice. You can do whatever, or you can just simply complain. But you don't get involved in the technical nitty-gritty of trying to make things work because it backfires. When an elected executive tries to put pressure on the head of a central bank, you end up with higher inflation because they get them printing money at times when it's not justified for purposes to pay off things the elected official wants.

5:44This kind of political propositioning then leads people to expect inflation, and that becomes self-fulfilling. And you create a situation where people expect inflation, and you just get more inflation, which is bad for the country. Now, we know that it has long been the practice of the Fed to avoid overfights with the president or Congress, but watching Jerome Powell's statement after receiving that subpoena, that is just a remarkably different tack. Why do you think such a change? I think Chair Powell, who has been extremely restrained and careful under huge attacks on him, as mentioned Governor Cook, former Vice Chair Mike Barr, and others on the Fed, finally realized that he had to draw a line and he had to make an appeal that would lead to Congress getting involved and realizing what's at stake.

6:36And he had to make an appeal so that the public and markets would see that this was at least as unprecedented for the president to do something like this. It may be that they did cost overruns on the new building renovation at the Fed. But anyway, even if they did, that's something that Congress reviews and isn't criminal and wasn't anybody's fraud and wasn't the personal gain of Chair Powell. So I think he felt he didn't have a choice at this point. The Fed has always been much more answerable to Congress than the president because Congress has the committees, the banking committee in the Senate, the finance committee in the House that oversee, according to the Federal Reserve Act, how well the Fed is doing, do they have the right priorities in setting the priorities for the Fed.

7:24So it was also, as so many things are these days about calling on Congress to step up and exercise its constitutional role. I think that's part of why Chair Powell finally broke and felt he had to speak bluntly. And Powell only has months left in his term as Fed chair. President Trump will get to nominate his own replacement. And we've already seen at least one Republican on the Senate Banking Committee, Tom Tillis of North Carolina, say that he would vote to block Trump's nominee unless the DOJ investigation is resolved. Adam, what would a prolonged fight over Powell's replacement mean for the Federal Reserve day in and day out?

8:00I think one of what happens to the Fed is you get a paralysis. You get a paralysis because there's all kinds of machinations that go on. There are two jobs that Chair Powell actually has. He is the chair of the Board of Governors, and he's the chair of the Federal Open Market Committee. The reason this matters is, first, Chair Powell's term as a governor, not as chair of the Board of Governors, goes on for several more years. He can stay on the committee if he decides he needs to, in which case he'll still have a vote. And in which case it is possible that the committee votes to make him chair, even if he's no longer chair of the board of governors.

8:40The second thing is if Chair Powell, for whatever reason, deciding he wants to depoliticize, deciding he's had enough, whatever reason, I have no idea, were not to continue on the committee as a governor, then President Trump would very quickly have a majority of his appointees on the Board of Governors, but he still wouldn't have a majority in the FOMC. The ultimate effect, though, is paralysis because there would be very split votes and no clear direction. Big picture, as you take stock of the future of the Federal Reserve at this moment in time, does it look any different to you right now? I think it does.

9:15I think like a lot of things that have gone on in the economic sphere and other spheres under the Trump administration this term, you're making pretty irreversible changes to how much people can trust in the power of institutions. The Fed has even legally had a special status with respect to monetary policy to be more technocratic, to be more independent, going back to that word. The Supreme Court has affirmed that, although they're narrowing it over time. I mentioned earlier, Wana, the idea that expectations matter because it's not just what the Fed decides, it's what people think they'll decide when inflation comes.

9:54And so I think this will ultimately result in the Fed getting more rational no matter who Trump appoints after the next inflation, but that the inflation will stay higher and stay around longer because people will expect less from the future Fed. And that will be a cost that we'll all pay for an ongoing period. Adam Posen is president of the Peterson Institute for International Economics. Thanks so much. Thank you. This episode was produced by Henry Larson with engineering support from Ted Meebane. It was edited by Courtney Dorning and John Ketchum. Our executive producer is Sammy Yannigan.

10:46It's Consider This from NPR. I'm Juana Summers.