The Fight Over Fed Independence Just Got Taken To a Whole New Level

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0:33Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, I feel like we're, what, about 10 days, 12 days into 2026. And how many emergency episodes have we recorded so far? This is going to be our fourth. Our poor producers. You know, and they keep happening on weekends, too, which is not the big the big developments keep happening on weekends. But I think it's going to be a busy year for us. Sad, but I am sure you are correct. I mean, from the news business perspective, there's certainly no shortage of news flow. And that can be a good thing.

1:09But it is hard to keep up nowadays, as you mentioned. So I know I want to do a Claude Code episode. When are we going to get around to that? So this is the second weekend of 2026. And the news this weekend is that Fed Chairman Jerome Powell said that the central bank has been served with a grand jury subpoena from the DOJ threatening a criminal indictment. And this has to do with the renovation of a Federal Reserve building, which, you know, Trump has made noises about before. Specifically, apparently the wrongdoing for this particular indictment or potential indictment is that Jerome Powell might have lied when he gave his congressional testimony back in, I think it was June of last year.

1:52But as we said, you know, our timelines are starting to all melt and blur into one. But basically, this is the next big escalation in the Trump versus Fed fight. Yes, exactly right. And I think there's a few interesting things here. I mean, And obviously, Jerome Powell is on his way out already as Fed chair, though he could stay on the board. And that's interesting. And now I think there's people are thinking, well, maybe he's going to stick around more because of this. And then the other element, too, is what I would say is like one of the most direct statements in response. Yesterday evening, Jerome Powell put out a video and a statement in which he said that this subpoena is really about the administration's frustration with interest rate policy.

2:41And, of course, Powell has been very diplomatic with all the criticism, really not commenting at all about all of the various critiques. We're just going to do our job. We're going to do the job for the American people, et cetera. Basically deflecting any questions on the politics surrounding. And this is a major break. Our colleague Cameron Kreis, as he put it, this is the straw that broke the camel's back. And he's being more direct than almost anyone else in public service or government, et cetera, and saying this is essentially extortion. This is intimidation. This is thug behavior. And this is not how he's talked about the pressure in the past.

3:18right and if you watch the video i mean pal has uh annoyed um grandpa that has had you know enough of all of this nonsense just written all over his face bad weekend for pal by the way because the the guitarist from his favorite band grateful dead also died so you know not a great weekend for pal but obviously on a serious note we need to talk about what all of this means how it fits into the ongoing tensions between the central bank and the Trump administration. And who better, who's the man that we always call when this happens? And I guess it's happening more frequently nowadays, but we always call Lev Menand.

3:56He is, of course, a professor at Columbia Law School and the author of The Fed Unbound. So Lev, welcome back to the Odd Lots podcast. Thanks for coming on at short notice. Thanks for having me back. So why don't we start with, let's just put this in context. I've seen a lot of people talking about this kind of criminal indictment or possible criminal indictment as an unprecedented escalation in terms of central bank versus presidential tensions, I guess. How unprecedented is this? I think this is about more even at this point than the central bank and central bank independence. This is an attempt by this administration to force out its perceived political opponents from the government.

4:45And so this is quite unprecedented. We haven't seen anything really quite like this, even in this administration over the past year. You know, something analogous would be, you know, a criminal investigation of Chuck Schumer or Hakeem Jeffries or a Supreme Court justice. Jay Powell is a senior government official, and the administration's made quite clear that it would like him to carry out his duties differently from how he was doing it. And now they are basically threatening to throw him in jail if he doesn't step down or comply. And so this is a very, very significant escalation that is different in kind, even from what we saw over the summer, where the administration was sort of pursuing potential removal actions against various members of the board, including Powell.

5:44This is a criminal investigation, which I think is different in kind and should be understood to be a very different set of issues that go well beyond the Fed itself. Right. I think what's striking here is we're talking about this in the context of Fed independence questions. Right. Can the president remove a Fed chair or a Fed governor or whatever? Can they be fired? But this is kind of separate because this isn't really there is this question and this question will get to the Supreme Court at some point. But this is sort of like a sideways thing or a parallel thing from that. This is about accusation of a crime.

6:26Yeah, exactly. And so there are now multiple different sort of legal proceedings underway involving the administration's effort to basically cow the Federal Reserve into submission and also sort of get to a four vote majority on the board of governors. One dispute involves Lisa Cook. And incidentally, we're just days away from Supreme Court oral argument in the dispute over whether President Trump's efforts to terminate Lisa Cook last year were legally adequate. Right now, the courts have kept her in her job. So he was not actually able to fire her, but he's still moving to do it. And the Supreme Court's going to weigh in on whether he can in a matter of days.

7:11This is not a similar action against Powell. Trump has not at this point attempted to remove him from office under the statute. This is an attempt to basically bully him out of office using the Department of Justice, which is a very different thing. You know, his liberty is threatened. You know, it's not just that he could lose his job. It's that he could go to jail. And I can't think of any analog in the history of the U.S. Central Bank or any, you know, U.S. agency to this sort of action by an administration against a member of the government, an official in the government. So how should we actually think about the timing of all of this?

7:59Because, I mean, you know, everyone knows Powell is on his way out anyway. It's not that long until we're going to have a new Fed chair. So the idea of going after him with a potential criminal proceeding when, you know, pretty soon he's not going to be there anyway doesn't necessarily make much sense in terms of influencing actual Fed policy. but maybe it makes a lot of sense to your earlier point about seeking revenge against people who are perceived to be enemies. This is about a lot of things at once. I think that's right. It's like maybe let's try to tease out some of the different things that are going on here.

8:39One is that Powell is still serving as chair and his term runs until May. And Trump has been clear that he would like to replace Powell as chair and that he has in fact identified who he wants in that job. And so on one level, this may be about getting Powell to step down before May so that he can be replaced months earlier. I agree with you. That doesn't seem like justification for this sort of escalation on its own. As Joe mentioned earlier, Powell is also serving a term as governor. That term runs until 2028. And if Powell were to choose to stay on the board, not to resign as governor when his chair term expires, that would take a seat that Trump would otherwise be able to nominate someone to fill.

9:36And that is relevant because the board at the beginning of Trump's term had seven governors on it. And so it was full. And those governors have 14-year terms that are staggered every two years, designed to prevent a president from being able to quickly take control of the board with their own appointees, right? It insulates the board from the White House to have 14-year term governors, seven of them, who are only turnover every two years. But if a lot of those governors can be induced to resign early, then the president can put his or her own people in. And so one thing that could be going on here is an effort to get Powell to step down from his governor's seat.

10:26Famously, Mariner Eccles, who was the chair of the board in the 30s and 40s, when he was no longer chair, he stayed in his governor's seat. And that is unusual, but can happen when the stakes for who's in those seats are high, like they are now. But I also think it's worth recognizing that there's something going on that's bigger than the Fed here, that it isn't just sort of this micro politics of, you know, Jerome Powell's seat as chair, Jerome Powell's seat as governor, that's about Jerome Powell as a high profile, prominent government official who has not bent the knee, being made an example of so that everybody else on the board of governors and throughout the U.S.

11:20government can see what could happen to you if you defy the administration. And that's why I feel the stakes for this are actually quite high. And it's about the larger dynamic of what happens in a government where people are scared of the White House. Right. There's a few different things going on here, which is that like, you know, you could it's not crazy to think that we should have a set like one could argue. And I'm sure other countries have this. I don't know about the monetary policy structure in other countries, but I'm sure other countries have it such that the chairman of the central bank or the head of the central bank is directly accountable to the head of state and can be fired, etc.

12:07Like these are reasonable things to debate about what is the optimal structure, et cetera. The idea of criminal charges or the perception, which many people share right now, that criminal charges, because you don't like essentially because someone doesn't like the job you're doing, obviously gets to an even deeper issue of governance that would apply in any governmental system anywhere. One thing I just want to know, Polymarket has a bet on Jerome Powell out of the Fed board by the end of the year. That was trading in the mid 80s last night. That's down to the mid 70s today. So clearly not a lot of money on this.

12:42It's just sort of an interesting thing to note that already there's maybe this expectation that he will not just like step away quietly now as expected. Also, Tom Tillis, the Republican on the Senate Banking Committee, already said he's not going to he's going to block any Fed nominations at this point. So that's another impediment to who you know, some other Republicans stand up to Trump on this, whether Trump can get that majority that he craves? I think it's very unclear how this is going to play out at this point. Jay Powell is somebody with allies on Capitol Hill, allies in the Senate Republican caucus.

13:22He is, in fact, a Republican. He was, in fact, nominated to this job by President Trump. And he could fight this and stay in the job. You know, it's hard to know. And to some extent, it's a personal choice for him whether to resign in May or now or to stay in the job. And it's also early to tell whether there'll be an attempted removal of Powell the way there was an attempt to remove Lisa Cook.

14:28Thank you. podcast can help you make smarter decisions today. Stay sharp, stay briefed, find Barclays Brief wherever you get your podcasts. What's the actual status of the Lisa Cook proceedings? Because this is the other common thread. There are many common threads running between the Lisa Cook action and this potential action against Powell, which is that Bill Pulte, the FHFA director, is supposedly the sort of mastermind or the driving force, perhaps, between both of these, not charges, but well, one is a potential charge and the other one is potential firing for misconduct. Yeah. So the Cook case is set for oral argument in a matter of days from now at the court, And then the court could issue a decision in that matter any time between now and June at the end of its term.

15:28And given the stakes of the case, you know, often high stakes cases are decided right at the very end. You know, June, there's this like, you know, period of tubes when the Supreme Court, you know, issues a lot of important decisions. I wouldn't be shocked if this case was, you know, resolved in June. When the court will also be considering a case involving Rebecca Slaughter that was argued in December about whether there can be any agencies where the president only removed the heads for cause. And it's expected that the Fed is going to be carved out from a decision that would invalidate those provisions in other statutes.

16:08But if the Fed wasn't carved out and the court decided in that case to just invalidate all of the laws that limit the president's ability to remove officials to situations involving cause, then of course, Trump could just fire everybody on the board without any reason. And that would moot the Lisa Cook dispute and she would be removed. So that case is also likely to be decided in June. And so those two cases are sort of making their way towards a decision right now. This has barely begun and there's no parallel sort of removal action, but it's a criminal proceeding. And so it will raise a lot of different legal issues from those other two cases.

16:54So according to Nick Timrose at The Wall Street Journal, Jerome Powell had already hired the firm Williams and Connolly on his own dime. Powell is a rich guy, successful businessman, lawyer. He can afford to hire great lawyers and he's going to have to defend himself. How does that work though? Like the sort of, and just maybe in general, I don't know, like in terms of the expectations of, you know, if people at the Fed are going to be subject to criminal proceedings or charges or subpoenas or whatever, the obligation or the incidence of expense for these defenses, What does the law say about who has to pay for these things?

17:34Yeah, the law does not permit the agencies to to pay for this in any way. And so the officials are on their own. The legal staff at the Board of Governors cannot represent Powell in a proceeding being brought against him by the Justice Department. They can't represent him in a removal action by the president. And so these matters require you to hire your own counsel. And there are organizations that arrange for lawyers to represent people in these positions pro bono or will pay the legal fees. But it definitely has an impact on who can serve in the government. This is part of why the stakes of this are quite high.

18:26This sort of thing scares people away from government service and leads to resignations. Recall over the summer that, you know, Governor Cogler resigned abruptly and without explanation six months before the end of her term. and I think there's a fair amount of information in the public domain now that she was also being investigated and you know Alvaro Bedoya for example was a commissioner on the Federal Trade Commission like Rebecca Slaughter who was removed by President Trump in the spring and you know he had to go out and get another job and so he can no longer sue to be reinstated in his current job You know, he can only sue for damage now.

19:13Rebecca Slaughter has held out to try to get reinstated, but it requires her not to work right now. And not everybody can do that. And that's part of the issue here is when the U.S. federal government, you know, throws its full weight against an individual, very few people can afford personally, financially to, you know, to fight back. And so a lot of people are frightened and and and a lot of people don't stand up. And and so part of the story here is all of the sort of bullying that doesn't have to happen because people, you know, on their own change their behavior to avoid drawing the ire of the White House.

20:00Just real quickly, I recall, you know, of course, at the beginning of this term in office, Trump got these settlement agreements with major law firms. I believe Williams and Connolly was not one of them. But does that create an additional complication of like people fearing that they can even get adequate legal defense in certain situations from law firms or from a legal community that to some extent feels itself under pressure from the administration? Yeah, absolutely. There's a lot of elite lawyers that are scared to represent people who the administration perceives to be enemies because the administration has made clear that they will go after the lawyers who represent those people.

20:39It's not even like a wink, wink, nod, nod. It's pretty explicit. There are a number of firms that are representing clients who are in litigation with the administration, And they tend to be firms that specialize in litigation and specialize in litigation against the government. So like a Wilmer Hale is a firm that represents routinely clients that are in litigation with the government. So it's a natural posture for them to take on, you know, the case of, say, an individual who's in litigation with the government. But firms that aren't otherwise, you know, in litigation with the government, you know, may decline to represent clients like this altogether.

21:25And that is also a big problem that goes beyond this specific case. So, Lev, I know you're not sat in front of a Bloomberg terminal right now, but Joe and I both are. I can't afford it. And we're recording this early on Monday morning. And the market reaction has been negative. So we've seen stocks are down, yields are up a little bit, gold has been rising. But we haven't seen panic in the market. Certainly, if you look at the yield on the long bond, which is where you would expect a lot of concerns about central bank independence to actually show up, it's not selling off massively. What do you think about the market reaction at this point?

22:12Or let me phrase it another way. Even though we've now had basically a year of concerns about central bank independence and the idea that Trump is going to push for lower interest rates at a time when perhaps they're not warranted, the market's kind of been shrugging, right? We haven't seen a huge reaction in things like tips and stuff like that. What's going on here? What accounts for maybe the disconnect between some of the commentary, which is very worried about the future direction of independence versus the actual short-term market action? I think that the way the market prices this sort of potential non-linearity sort of regime change in our monetary and financial architecture is, it's a bit like what they say about bankruptcy.

23:10It happened gradually and then suddenly. I think that as long as the board continues to, in fact, be controlled by non-Trump appointees, you're not going to see a lot of market pricing reaction. But we could reach a sort of tipping point where there's a sort of rapid and dramatic negative reaction. I don't know that we will reach that. You know, it felt like we might have been approaching one over the summer leading up to the Cook firing. And then there was a real step back from that by the administration. but I think we're still several seats on the board away from the market seriously considering and pricing in a central bank that engages in sort of an inflation tax-based policy or monetary financing or something like that.

24:13I also think that there's a lot of issues being raised right now that this policy is about that aren't really related to value of the dollar and the excessiveness or appropriateness of the monetary policy stance. The central bank is a very powerful organization that carries out a lot of other responsibilities, which could potentially be weaponized by a board in control of the White House that would have no effect on the value of the dollar. The whole payments system, the sort of financial infrastructure backbone and runs through the Federal Reserve. And putting that infrastructure in the hands of an actor that's willing to abuse it is very, very dangerous, but isn't going to change the value of the dollar.

24:58And so, you know, not everything that happens with respect to the Fed, we should like, you know, calibrate how concerned we are based on whether we're seeing, you know, the long bonds move. Setting aside precedent or whatever, you know, I think you could make a really good argument that the monetary functions of the Federal Reserve, the FOMC, the rate setting committee, that's under the purview of Congress. This is the power to coin money in a different version. It's quasi fiscal in nature, especially when there's targeted direct lending programs, et cetera. On the other hand, you know, I think you could see the supervisory stuff.

25:33You'd say, well, this is executive branch stuff. This is about enforcement of the law, et cetera. But how is it done? Like, are they how interlinked? I think actually does a lot of your work. How interlinked are these two functions, the supervisory stuff and the monetary policy setting such that the Fed can't really be cleanly described as belonging to one of those two branches of government? It's a very deep question. My view on this is that monetary policy is bank regulation and vice versa, that the money supply in the 21st century is created by investor-owned banks. JP Morgan, Bank of America, they're the ones actually issuing the money in circulation that people are using.

26:25And it's their expansion of the money supply or contraction that is affecting the rate of inflation and all of the macroeconomic variables. What the Federal Reserve is doing when it conducts monetary policy is changing the incentives and constraints on the collective balance sheet of the banking system to expand and contract. And the main way we adjust those constraints is through the overnight interest rate. But the overnight interest rate itself is not what's important. It's about the decisions of JP Morgan and Bank of America loan officers to expand or contract the amount of deposits in circulation.

27:10And there are a lot of other government tools that affect that. And we have chosen, for good reasons, to focus on the overnight interest rate as the primary tool for adjusting the rate of expansion and contraction of the money supply, but obviously capital requirements, liquidity requirements, supervisory expectations all have an influence on the balance sheet of the banking system and the rate at which it expands and contracts. And so the idea that we could split these functions and that we would just have this bank regulator that isn't affecting macroeconomic conditions is fanciful. We might hope to create a bank regulator that is not adjusting its regulatory and supervisory posture in an effort to influence macroeconomic conditions and that that man sits only with an overnight interest rate authority.

28:11But we would have to recognize that this other organization that has the regulatory and supervisory responsibilities could perhaps even more effectively influence macroeconomic conditions by adjusting its posture. And certainly in this sort of environment where we're trying to insulate from executive influence the rate of expansion of the money supply, you would not achieve that if you hand it over to the White House regulatory and supervisory policy and left in an independent agency just the overnight interest rate policy. you'd have quite a struggle between those two bodies. There's a lot of other issues with splitting them up, but I think that's just sort of the bottom line point is the money supply is bank issued.

29:02So bank regulators are fundamentally involved in monetary policy broadly construed no matter which way you slice it. All right, Lev, we could probably talk to you about this for a few more hours, but we're gonna have to leave it there just because we wanna get this episode out as soon as possible. But thank you so much for coming back on Oddbots. Really appreciate it. Thank you for having me back.

29:38Joe, that was such an interesting discussion. Obviously, there's the sort of short-term developments of what will and won't happen right now. But also, I guess the long-term meditations on the relationship between the Fed and the U.S. government, the federal government, I find very interesting as well. And it is true, you know, in a high interest rate environment, interest rate payments become a huge, huge chunk of the federal government's spending. And so interest rates become much more of a constraint on what the U.S. government can and actually cannot do. And so to some extent, I guess I guess it's unsurprising that Trump would go after this as a limiting factor.