Showdown at the Federal Reserve

0:09Here's Jerome Powell, Chair of the Federal Reserve, speaking on Sunday night. On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June. I have deep respect for the rule of law and for accountability in our democracy. No one, certainly not the chair of the Federal Reserve, is above the law. But this unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure. This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings.

0:48It is not about Congress's oversight role. The Fed, through testimony and other public disclosures, made every effort to keep Congress informed about the renovation project. Those are pretexts. The 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. This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions or whether instead monetary policy will be directed by political pressure or intimidation.

1:25Oof. Mic drop. Hey, Rob. I mean, what on earth is going on here? It tells you something that everyone was astonished by that speech Because all that was, was a man saying something we all know to be true. Every single person knows to be true. And it tells you something about the dialogue around our political system. That this is, you know, somebody just speaking plainly about what is obviously true is a mic drop moment. And that thing that is true is the independence of the Federal Reserve, the US Central Bank, the world's most important financial institution, is in jeopardy. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

2:12I'm Katie Martin, a markets columnist at the FT in London with plenty to write about. And I'm joined through the magic of technology all the way from New York City by that guy, the slightly stunned Rob Armstrong off of the Unhedged newsletter. Rob, Central Bank is normally talking code very, very politely. This was not that, was it? This was really remarkable. And for me, it was an extremely heartening moment because it was kind of non-hysterical, concise, and absolute all at the same time. And I just thought it was great. And, you know, he did with that plain speaking, he allowed a lot of good things to happen.

3:00I think he gave cover for Republican politicians to say, OK, now you've gone too far, Mr. President. And I think he allowed markets to kind of breathe out and realize maybe there is a line here on central bank independence that won't be crossed. Yeah, this will not stand, right? So for people who are not familiar with how central bank communication works, these things are very tightly choreographed and very well planned and all of that. It is very, very unusual for the Fed to come out and make an unscheduled statement on a Sunday night. That's the sort of stuff that's normally reserved for Lehman Brothers has just died or there's a massive pandemic going on and we need to, you know, pull the emergency cord or something like that.

3:56So just the fact that they said anything in this sort of forum is like extraordinary. But yeah, it was absolutely a case of you guys have been on our case for months. You have tried to get rid of Fed Governor Lisa Cook, and that's going through the Supreme Court at the moment. We should have a resolution on that in the next few weeks. You have constantly beaten up on us for not cutting interest rates as fast as Trump wants us to. You've made all sorts of weird, spurious suggestions about the renovation of the Federal Reserve headquarters, which, you know, sure, they're running over budget, but it's a building project.

4:33These things run over budget. A government building project. Yeah, exactly. So, you know, and Powell is just effectively saying here in the statement on Sunday, knock it off. Like we've got a job to do and it's incredibly important that we're not subject to political intimidation when we're making decisions on interest rates. And, yeah, I mean, I was kind of blown away by this challenge. I thought, finally, someone's standing up to what's going on here. Yeah, it was very impressive. And I think you have to bear in mind that while for most of us, what we do is more important than what we say, in the case of central bankers, what they say is more important than what they do.

5:21central bankers a key part of their job is convincing the world that they will do in the immortal words of mario draghi whatever it takes yeah and they don't actually do that much their job is to make people believe that if things really go sideways they will do everything even while they are not doing very much. Yeah. So Mario Draghi is the absolute maestro of this. He was president of the European Central Bank in the middle of the Eurozone debt crisis. And exactly with that tiny little sentence, we will do whatever it takes to solve this problem. Problem 70 % solved. So as you say, it's all about words.

6:10I think we should not forget one important thing here, Rob, which is that I did say just a couple of podcasts ago that a president who's willing to demolish a wing of the White House, bomb Caracas and threaten Greenland could not be trusted when it came to the Fed. And you, Rob Armstrong, said, don't worry about it. It's going to be fine. Yeah, it's true. I've been too complacent. And, you know, looking back now at the things I said and thought, you know, the Lisa Cook incident should have taught us that eventually he'll get to Powell. He was warmed up with that. You're coming round to my way of thinking.

6:47Yeah, I'm afraid. Although it makes me feel like I am having bamboo spears stuck under my fingernails, but I will admit that in this case you have said something that turned out to be right and I have said something that turns out to be wrong. I'm going to take a little clip of that and use it as my ring tone.

7:11but i mean i think the one question we should tackle here is whether powell has done enough right speaking to a lot of people on wall street yesterday a lot of the people i talked to and by the way after this whole incident happened monday rolls around and markets open and it is calm out there. Let's talk about that first. Right. So, you know, I think there is this sort of expectation out there that markets are somehow that their job in life is to be a barometer of like stupid or horrible ideas. And that's not how they work. Right. So all things being equal, the steps here are Trump intimidates the Fed or reworks the Fed in some way to make it do what he wants.

8:03I don't know, maybe he puts a sign over it saying this is now called the Bank of Donald Trump and it does whatever Donald Trump wants. I'm spitballing, but you get the idea. It's been known to do stuff like that. Yeah. This is an organization. This is an institution, an incredibly important institution that he wants to control. And so help him, he's going to find a way to control this thing. That's the risk here. And if that happens, that means that you have a Federal Reserve that is cutting interest rates really, really hard, even if you've got inflation that's running above target, which is pretty dangerous stuff.

8:34It means you can get runaway inflation but it also means you get the dollar falling out of bed and it means you're putting a big sell signal over US government bonds and all sorts of terrible things happen. So it does look a little bit weird that you roll into work on Monday morning after this all happened on Sunday night and markets are fine. But the fact that it's like, you know, kind of stupid, this stuff that Trump and his hangers-on are trying to do here with the Fed doesn't mean that markets should fall on it because if he does manage to get interest rates a lot lower, at least in the short term, that is good for stocks.

9:11It's not bad for stocks in the short term. I agree. Added to which, you know, you've already got the Federal Reserve cutting interest rates. Fine, not as quickly as Trump would like. But so what's the market going to do? Immediately price in loads more interest rate cuts Or does it say, I just don't think he can really do this? So I think the fact that the main market reaction is a jump in gold and that's kind of it, that kind of makes sense to me personally. I was surprised that the bond market and the rates market and all its various permutations was broadly not interested in the whole thing.

9:51I expected a mild reaction from markets, but not as mild a reaction as we got from the rates market in particular. And part of that credit to Powell. He drew a line. But I seriously wonder if this is really over. And in particular, I think whoever is next after Powell as chair of the Fed, and there's lots of interesting politics and ways this could play out. Whoever is next after Powell is probably irrevocably damaged as a figure of authority by this incident. I think that the market will give less credibility to this person knowing that they had to massively suck up to Trump to get the job in the first place.

10:50And I think people within the Fed, other members of the open market committee or the rate setting committee and other career bureaucrats at the Fed will look at this person coming in and see them as suspect, which is no no way to run any organization. So I think serious damage has been done here and that markets may respond yet. Things are going pretty well right now in the world. But, I mean, I use the metaphor I leaned on in my column was central bank credibility is a bit like a fire extinguisher. You know it's in the house somewhere, but you probably don't remember where. But when smoke starts pouring out of the kitchen, you start to remember how important it was and wish that you knew where that thing was.

11:51Oh, yeah. That credibility comes in all kinds of handy. I mean, so a couple of points there. First of all, I'm not sure that the market ever really intended to take the successor to Jay Powell super seriously in the first place. because he's always going to pick a yes man and it was always likely to be a man. The other thing is, because markets are so calm, this is the thing with Trump, we've seen it over and over again. When markets don't freak out, he looks around the room and thinks, this is fine, I'm going to have another stab at it. That is a bit worrying, isn't it? Because, you know, there's nothing in the markets right now to make him backtrack.

12:32So you'll remember that last April, He did his Liberation Day tariffs. The reason he backtracked really was because the bond market started to freak out. Unless something freaks out, I do think there's a reasonable danger that he's just going to keep running with this one. It's true. The counterpoint to that would be that we have seen some things in the last 24 or 48 hours that make me think that Trump's iron grip on the American political system is starting to slip. the comments of Republican senators and representatives about not doing this, the relative silence from the White House in defending this action.

13:15The stories now are all about, like, who's Trump going to fire? That's what the papers have in America. Is he going to fire Pulte or Bondi or whoever? And it's like, this is a lame duck president who is clearly flailing around a little bit to try to find something that voters will respond to. And it's like we're seeing the old man start to daughter a little bit. So maybe markets don't need to play quite as strong a policing role in the way you just described as they did in his first term or indeed in the last year. One important thing to stress here is that Trump is saying, what's that? Department of Justice is indicting J.P.O.

14:05It's nothing to do with me. Absolutely nothing to do with me. This is a Department of Justice thing. That means a couple of things. I think it means that if this all goes wrong, he could find someone to blame for that that's not him. But the other important thing here is that even if Donald Trump's signature is not on the bottom of this piece of paper that says, go and arrest this man, we all know that if it was a different guy in the White House None of this would be would be happening. Right. Lisa Cook wouldn't wouldn't be put under pressure. The head of the Bureau of Labor Statistics wouldn't have got the heave ho after some bad jobs numbers.

14:45None of this would be happening to Jay Powell if it was anyone else in the White House. So even if his name isn't on the piece of paper somewhere, we all know that this this is a Trump thing. Right. Yeah, that's correct. And whether it was his personal directive or just his people trying to anticipate his desires, that's an academic question. You know, it is conceivable and would be consistent with the pre-Donald Trump history of the Department of Justice, that the Department of Justice took initiative without the president. And even I think by as a kind of norm or tradition, there's often situations where the two stay separate.

15:26But I just don't think, you know, I don't think it matters one way or another. We know who's setting the tone here. But what we're seeing now is a bit of a kind of, you know, a rally behind Jay Powell. Right. There's a bit of a kind of Avengers assemble moment where like dusty economists with their half moon glasses are kind of, you know, coming out of their libraries and saying. Alan Greenspan. And, you know, I say this with respect to him. I didn't know he was still alive until I saw the statement from and I was happy to note it that Alan Greenspan is still alive and still signing letters at age 99 or 100.

16:03and he joined other former treasury and Fed officials signing one letter saying, don't do this. Ben Bernanke, you know, the dream team. And then we had a list of prominent central bankers from around the world write a similar letter. Interestingly, not including the Bank of Japan, which is a topic for another hour, but I thought was interesting. Yeah. So there is a rally behind him. Again, I keep coming back to this question, but I want to emphasize it. The game is still on. Right. We all you know, I think markets and people like us both want Powell to have slammed the door on this problem because people in markets hate thinking about this stuff.

16:44They don't you know, they're not good at calculating how they should respond. These are risks that are hard to quantify and are ambiguous. Central Bank independence itself is a kind of fluffy abstraction that markets people hate thinking about. We all want it to be over. But what I keep coming back to is it's not over and the risk is still out there. And there have been a few notes from Wall Street banks saying this creates a real risk for equities. And although equities, as you noted earlier, do respond well sometimes to lower rates and to a tiny little bit of inflation or they're at least willing to tolerate a tiny little bit of inflation.

17:33Boy, do they not like things getting out of hand. So I think you made the right point. We shouldn't make the classic mistake of thinking that markets instantly discount future damage to the financial system and be on our toes about what all this stuff means. I mean, I saw I felt genuine relief when I was sitting on the train this morning and the little alert came across my phone saying that inflation stayed constant between November and December. We got the CPI inflation report because, boy, this whole discussion might have changed color really quickly if we got a surprisingly hot December inflation report, which, thank God and knock on wood, we did not.

18:24Right. So, you know, the best outcome here, of course, is that we cruise through the next three years and we don't need the fire extinguisher. In other words, markets kind of look after themselves and we have this drama running on the side, but none of this is ever put to the test. But, you know, tests come up and they come up pretty often for markets. So I don't think you can count on that. You know who has been conspicuously quiet about all this is, as a rule, Wall Street. The big Wall Street heavyweights, the big titans, where are they? When are you going to speak up about this? When are you going to join the resistance behind Jay Powell?

19:11So we have seen Jamie Dimon from JP Morgan saying, and I quote, it's probably not a great idea. And, you know, he waited until the earnings announcement to say it, basically until a reporter asked him a question about it. I would have liked to see, and in a different universe, I would have expected to see a statement from the titans of finance saying, don't do this. Because nobody has more at stake in this than the people who are in the business of money. So if you are a titan who is listening to this, if you are some combination of Jamie Diamond from JP Morgan, Jane Fraser from City, Steve Schwartzman from Blackstone, Larry Fink from Black Rock, Ken Griffin from Citadel.

19:59Get off your butt. You know, if you're too chicken to do it by yourself, there should be a joint letter that says, we like the Fed just as it is. Thanks very much. I think you're absolutely right that they have not covered themselves in glory so far. No, still time. Still time, Titans, if you're listening. There is glory left if you would like to get it out of the glory container and pour it all over yourself.

20:25We often like to end on a bit of a prediction. Do you think this gets worse before it gets better or do you think it gets better before it gets worse or not worse? What do you think? I think this gets worse before it gets better. I think there's a risk that he digs his heels in here. What do you think? When you say he, do you mean the president or? I do. I do. Yeah. Yeah. I will take the other side of that. I think that Powell has done well. I think the support of the other officials and the global central bankers and the Republican congresspeople, I think all of that matters. And he will try to let this die.

21:02my perception of the risk is that it bubbles up again when we have some kind of problem in markets. And also on this show before, you can't put the shit back in the donkey. Once you've launched this sort of attack on the Fed, you can't unlaunch it. This is going to hang over it now. But before we go to the break, Katie, I should mention something. when I was sort of just banging the phone yesterday calling Wall Street people, what do you make of all this? And what a lot of them said is, several of them said, I should say, is what we really care about these cases in front of the Supreme Court. There's two cases.

21:41One of them is about Lisa Cook, the other Fed governor, who has been accused of failing to do her paperwork on her mortgage in the correct way, and Trump wants to fire her for that. And then we have another case about the general right of the president to fire the head of independent agencies at will. A lot of people were like, what the Supreme Court says is actually really important here. So if the Supreme Court gives him the OK, gives the president the OK to get rid of Lisa Cook, maybe the game looks different and we have a real problem. Oh, you still believe in your institutions and your checks and balances?

22:19I love that for you. I have the face of a grizzled old man, but I have the soul of an innocent child. That is adorable. Okay, so we're going to be back in just a tiny sec with Long Short.

22:38Okie doke, it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Rob, what you got? I am long the greatest app in the history of cell phones, Katie. You are? I am. And this app is a Chinese app I read about in the Financial Times. And the name of the app is Are You Dead? And in a society where more and more people are elderly and live alone, this is an app that asks you every day or so whether you are alive. And if you don't respond, I think it contacts the authorities. but I like this as a kind of philosophical prompt. Like even I, a healthy man who lives around other people, I need my phone to ask me whether I am truly alive every once in a while.

23:27We should both get it and I'll check on you as a kind of care in the community thing every now and then. If you give me your wife's number as an emergency contact. I am long dead trees. I had a funny experience on the train into work today where there were like fully like seven or eight people sitting around me reading actual books, like dead tree paper books, like it was the 1990s or something. Man alive. Well, I love that. I love that. And I thought, I'm going to read like a paper book. One of these books that doesn't glow and isn't made of plastic. I think it's beautiful. Great idea. As the son of a librarian, I endorse this idea.

24:11Dead trees and dead apps. It all happens here, the liveliest podcast on the internet. Listeners, we are going to be back in your ears on Thursday to check you're still alive, so listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehouse. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer.

24:52I'm Katie Martin. Thanks for listening.

25:12Thank you.