How Trump's central bank beef could hurt the economy

0:01Sierra Juarez:NPR.

0:11Sierra Juarez:This is The Indicator from Planet Money. I'm Adrian Ma. New data this week from the Consumer Price Index shows inflation rising 3.8 % over the past year. That is the highest inflation rate we've seen since 2023. And it's happening at a time when the nation's main inflation-fighting institution, the Federal Reserve, is getting a shakeup in leadership. On Friday, Fed Chair Jerome Powell will be replaced by President Trump's new pick, Kevin Warsh. And as a new documentary by Frontline PBS explains, this is a milestone in Trump's long beef with the Fed. Economically, this is the most important fight of the second Trump administration.

0:51If I want him out, he'll be out of there real fast. This agency feels it is not under any obligation to be accountable.

0:58Sierra Juarez:Frontline correspondent James Jacoby directed the film, which is called The President vs. the Fed. After the break, he shares what he learned while reporting on this unprecedented power struggle between the world's most powerful politician and the world's most powerful bank. This message comes from Indeed. Hiring? Do it the right way with Indeed's sponsored jobs. Claim a$75 sponsored job credit to get matched with quality candidates at indeed.com slash podcast. Terms and conditions apply. This message comes from HIMSS. Notice your hairline creeping back? HIMSS makes it simple to do something about it.

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2:24Sierra Juarez:James Jacoby is director of the new frontline documentary, The President vs. the Fed. James, thanks for being here. Thank you so much for having me. For this film, you spoke to economists, Wall Street bigwigs, the business press. And what strikes me across all these different kinds of people is there seems to be a very strong respect for the Federal Reserve, which is not to say that everybody thinks the Fed always gets it right, but there's still an inherent respect for the Fed. What do you make of that? Yeah, it's something I found so interesting right now, especially when so many institutions are kind of under attack in America.

3:01Across the political spectrum, there's respect for the Fed. Yes, there are grievances with it on both the right and the left, but it was designed by Congress to be independent from political wins and political pressures because it makes long-term economic decisions for the country. I, too, was surprised that there's kind of this universal appreciation for the Fed's independence and also not that many people willing to defend the president's attacks on the Fed. That started actually way back in his first term.

3:31Sierra Juarez:Before we get to Trump specifically and his beef with the Fed, it does seem there is a natural tension between presidents in general and the Fed because presidents are politicians and they want to see the economy roaring while they're in office. With that, could you tell us about the story of Arthur Burns? Yeah, it's a story that we point to in the film because it's instructive. Richard Nixon was president. Arthur Burns was the chairman of the Fed at the time. And Richard Nixon was running for reelection. Like many presidents, wanted interest rates low because low interest rates get borrowing and spending up and economic activity up.

4:09And he put a lot of pressure on Burns to lower rates and the Federal Open Market Committee at the time, which sets the rates. Yes, how are you? All right, how are you? I'm having a meeting of my open market committee on Tuesday. Just kick him in the rump a little. Okay. Burns capitulated to the pressure and lowered rates when really things didn't call for it. And what we got was a period in the 70s and then into the 80s of very high inflation and stagflation, in fact, when there was low economic growth mixed with inflation. And it's looked back upon as a terrible period of economic history for the United States.

4:50There were a lot of other factors that went into it. There were the energy crisis, a lot of other problems economically at the time. But the Fed having kept rates low when it didn't call for it is one of the main factors in why we did get really high inflation at that point.

5:05Sierra Juarez:Of course, this history, this cautionary tale doesn't seem to be a deterrent for President Trump. And in his second term, he's repeatedly and publicly insulted Powell, like calling him names like numbskull, saying he has a low IQ. Last summer, Trump paid a personal visit to the Fed headquarters where he stood in front of TV cameras and accused Powell of going way over budget on a planned office renovation. Are there things the chairman can say to you today that would make you back off some of the earlier criticism? Well, I'd love him to lower interest rates. Other than that, what can I tell you?

5:43Sierra Juarez:And as we've covered before on the show, Trump's Justice Department later initiated a criminal probe into Powell. Now, Powell has denied any wrongdoing. But James, could you say more about Powell's responses to Trump's pressure tactics? Well, it's really fascinating because he goes public with a video, which as one person in the documentary describes, it looks like a hostage tape, basically announcing that there is this criminal probe and speaking directly about the president saying that this is all part of a pressure campaign to pressure the Fed to lower interest rates. Powell is defiant in the face of pressure that I think would even make Nixon's pressure on Arthur Burns seem kind of coy.

6:27Sierra Juarez:Oh, yeah. I mean, I don't think there's any way. There's no way to compare the two. I mean, for the Justice Department to be bringing that probe against a sitting Fed chair is completely unprecedented. I guess for context here, we should explain that interest rates are not just set by one person. They are voted on by a 12-member board called the Federal Open Market Committee. I sort of think about it as like an economist Jedi counsel. Jerome Powell is one member, but he's only one vote. So can you talk about Trump's other efforts to reshape this board to his advantage? Sure. I mean, the main other event has been the Lisa Cook case, where Lisa Cook was accused of mortgage fraud on a mortgage application that she put in.

7:11She wasn't really given an opportunity to respond to the allegation. And basically, within days of it being leveled, Trump fired her, or at least tried to fire her. And Lisa Cook then sued to stay in her position, alleging that the president didn't have the authority or the cause to fire her. She's remained in her position, and that case has gone all the way up to the Supreme Court. So it's not just limited to Powell here.

7:37Sierra Juarez:President Trump's a new pick to be Fed chair, Kevin Warsh, will be taking over Jerome Powell's spot. And I think it's fair to say that there are some questions from lawmakers, from people in the business community about whether Warsh can be independent as the Fed is supposed to be, or whether he will just be loyal to what President Trump wants. What do you think after talking to all the people that you interviewed for this piece? It's mixed reviews. There's a lot of people that I've spoken to in the business world who know Kevin Warsh, who worked with him at the Fed or on Wall Street, and think he's a very serious person and will take this job really seriously, and that he's independent enough from the president to make his own determinations.

8:22I think that skeptics of Warsh looked at his testimony, his confirmation testimony with alarm, because he was unwilling to say that the president had lost the 2020 election, that Trump had lost that election. And so those who are skeptical of whether Warsh will be independent, saw plenty of evidence in that confirmation hearing that alarmed them.

8:43Sierra Juarez:Finally, I guess I'm just interested in your kind of global thought about the Fed. It was created over 100 years ago, designed by Congress to be independent of politics. Does it seem like this design can hold up to the president's continued attacks? Yeah, that's a great question. I think there's no doubt that the president will continue to attack the Fed going forward because it's going to be very difficult for the Fed to deliver much lower rates right now, given how complicated the inflation picture is. You know, we have the war in the Middle East right now, energy prices skyrocketing, all sorts of inflationary pressures.

9:26So it's put the Fed, ironically, in a major bind. There's a lot of outcomes I don't know. You know, what's strange is I've reported on the Fed for a number of other films for Frontline, and they've been rather critical films of the Fed about kind of whether it's mistakes that they've made, identifying the inflationary surge during the pandemic, their use of all sorts of unorthodox financial levers that they've used in order to kind of benefit Wall Street and exacerbate wealth inequality in this country. What's unfortunate is that Trump's attacks on the institution have really changed the conversation that we're now talking about the very basics of independence versus the ways in which this institution that's at the center of the American economy could and should be reformed.

10:12Sierra Juarez:James Jacoby is a correspondent for Frontline PBS. And you can watch his film, The President vs. the Fed, on Frontline's website, YouTube, or the PBS app. Thanks again for being here, James. Thank you for having me. This episode was produced by Cooper Katz-McKim and engineered by Maggie Luthar. It was fact-checked by C.R. Juarez. Kicken Cannon is our editor, and the indicators of production of NPR.

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