Marketplace - Why Fed independence is crucial

Episode Date: October 28, 2024

If Donald Trump is reelected president, the Federal Reserve’s political independence would go “right out the window,” Alan Blinder, a former Fed vice chairman, told us. In this special episode, economists weigh in on the importance of Fed autonomy in policymaking, and what political interference — something Trump is threatening — could mean for the global economy.

What do you suppose happens if the Federal Reserve stops really being the Federal Reserve? From American public media, this is Market Plans. In Los Angeles, I'm Kyle Rizdall. It is Monday, today, the 28th of October. Good as always to have you along, everybody. We are, as I speak, a week and a day away from the end of voting in the 2024 election. It has been, as we all know, a campaign unlike any other. We are not going to recap because honestly nobody needs that.

What we are going to do though is a little what if because there's something that's been happening that's kind of gotten lost in everything. What if the most important economic institution in this country, literally of global importance in part because of its credibility and political independence, suddenly isn't independent or credible anymore. I have the right to remove. I'm not doing that. No, I'm not doing that.

I have the right to also take him and put him in a regular position and put somebody else in charge. And I haven't made any decisions on that. That's then President Donald Trump at the White House in March of 2020, talking about whether he was going to fire Fed Chair Jay Powell. The Federal Reserve gets a lot of coverage on this program because what it does, including among many other things, setting interest rates, deciding how much money costs, in other words, affects literally everybody in this economy. Here's another quote from the former president,

this one from last month, after the central bank cut interest rates by a half a percentage point. It really is a political move. Most people thought it was gonna be half of that number, which probably would have been the right thing to do. So it's a political move to try and keep somebody in office, but it's not gonna work,

because the inflation has been So bad and and think of this he missed the inflation. They missed it. They missed the number It's important to point out here that the feds not infallible They've made mistakes including in the past few years being late on inflation Charpal has admitted as much to me on this program Here's one more from the former president. I think I'm better than he would be. I think I'm better than most people would be in that position.

I think I have the right to say I think you should go up or down a little bit. I don't think I should be allowed to order it, but I think I have the right to put in comments as to whether or not interest rates should go up or down. That's from this month, the former president saying he ought to have a seat at the table when the Fed meets to discuss interest rates. He tweeted, back when that was a thing, about the Federal Reserve more than 100 times during his presidency. Things like, the only problem our economy has is the Fed.

And my only question is, who's our bigger bigger enemy Jay Powell or Chairman Xi? We should note Powell's political lineage for a second. He's a Republican served in the George HW Bush administration He was appointed to the Fed Board by Obama appointed chair by Trump himself then reappointed by Biden So here's the what-if appointed by Biden. So here's the what if. What if the former president's direct and repeated threats to the Federal Reserve actually stick? And before you ask, we're not both sidesing this because there is only one side.

President Biden has not once threatened to fire the Fed chair. Neither did Clinton or George W. Bush or Obama. None of them said that they, as president, should have a vote or even be consulted on interest rates or anything even close. Vice President Harris, same, which is why she's not part of this program today. This is from August. The Fed is an independent entity, and as president,

I would never interfere in the decisions that the Fed makes. What's at stake here isn't whether Trump's threats to Powell and the Fed move the federal funds rate a quarter of a percentage point or a half. What's on the line is the Fed's independence, a word you're going to hear a lot today because of what happens if it disappears. If somebody came in and looked like they were messing with that, you wouldn't just have like the US stock market

to worry about. Wendy Edelberg is the director of the Hamilton Project and a senior fellow in economic studies at Brookings. You would have the international financial system to worry about. I mean, the US Treasury market at $28 trillion is arguably the most important financial market in the world. And if we mess with that, we are putting the global economy at risk.

Pete O'Reilly Wendy was an economist at the Fed and elsewhere in government for years. We have talked to you many times over the years. I was looking at it the other day. And it's always been at moments of inflection for this economy and this society. We talked to you around the 2020 election. We talked to you on January 6th. And now we're talking to you about January of 2025.

And I guess as a table setter, I want your sense of where this economy is, not how's the economy doing, but how stable is this economy? I mean, what happens in the election puts the stability of the economy at risk. So they're intimately tied up with each other. If I could somehow answer that question without talking about the election, I would say the economy is quite stable.

Yes, prices are still higher than they were before the pandemic. But inflation is 2.4%. Unemployment is 4.1%. The American economy is the strongest in the world right now by far. It is still worrying to think about some of the outcomes that could happen depending on the election. Why is it worrying? There are three main things I worry about.

And frankly, most of them have to do with things that Trump has said he would do if he was elected. Number one on Wendy's list is tariffs. Number two is immigration. The third thing is worry that Trump is flirting with destroying the feds independence. Studies show central banks that are more independent are better at keeping inflation stable, which makes sense, right? Electoral politics operates on pretty short time horizons with reelection the main goal and low interest rates are popular with voters

Not so great though when inflation is spiking Here's another way to think about it. I had the utmost confidence in Janet Yellen as Chair of the Federal Reserve she is an exceptional economist and I knew monetary policy was in really good hands. She is now Treasury Secretary. I don't want her, even with all of her skills, I don't want her running monetary policy as Treasury Secretary. Why?

You just said she was the greatest thing since sliced bread. Yeah. So as Treasury Secretary, her job is to help achieve the vision set out by the president, who is in turn responsible for voters. And that's a whole political world of fiscal policy. Fiscal policy, things like tariffs and taxes, also the Inflation Reduction Act, and the bipartisan infrastructure law. We know that her priorities are to help achieve the president's vision. That's not the same as the narrow mandate that we give to the Fed of doing what they

need to do to help maintain low and stable inflation with full maximum sustainable employment. Keeping elected politicians away from monetary policy helps establish credibility for the central bank, that it's making its decisions purely on what the central bank, that it's making its decisions purely on what the data says, that it's playing the economic long game. That credibility is one of the reasons the American economy is the biggest and most important in the world.

If I'm a soybean farmer in Iowa, why does the $28 trillion global US treasury market matter to me? It means that the interest rates that you pay to borrow money to buy your machine, your harvester, I think soybean farmers have harvesters, you are paying lower interest rates to do that because the world really wants to lend money to the United States. Individuals and companies and other countries buy American treasuries, our bonds, our bills and our notes, in part because they trust that an economy run by a credible Federal Reserve is sound. There have been calls from Congress to change the structure of the Fed over the years from

both sides of the aisle. And there are examples of presidents from decades ago trying hard to bend the central bank to their political will. Wendy Edelberg, though, thinks Fed independence matters more today than it has in the past. In the 70s and 80s, when the Fed didn't have a lot of credibility and, you know, Nixon was putting pressure on Burns. That's Arthur Burns, who chaired the Fed from 1970 to 1978, and who Nixon leaned on hard in the early 1970s in public and in private to cut rates.

The U.S. Treasury market across the entire global financial system was in the single digits. Yields were in the single digits? No, a handful of trillion dollars. Oh, sorry, right, gotcha. That is now a $28 trillion market. And one of the reasons it's grown as significantly as it has is because, you know, all of these players across the international financial system

are really confident in the Fed's ability. Peter Van Doren That confidence would disappear if the Fed even appears to be making decisions on a president's behalf. Danielle Pletka I worry about this a lot because credibility is easy to lose and really hard to get back. If the Fed doesn't have credibility that in the long term they've got it, what's going to happen is that people are going to start to think financial markets, households, businesses, everybody, you and me, we're going to start to think that inflation is

going to remain high and we're going to start building that into our behavior today. And then if the Fed wants to convince everybody that no, no, no, we really mean it, we're going to get inflation back down to target, in this case, too. Not only are they going to have to slow the economy with monetary policy, but they're actually going to have to weaken the economy and pound it just for the purpose of convincing us that we're wrong. Think about that for a minute. The Federal Reserve would have to cause a recession to try to prove to people that it's

credible and independent. That is very bad. But look, recessions happen. We've had six since 1980. And markets go up and markets go down. But a recession that happens because the president publicly undermines the Fed is unheard of. So coming up, how we got here, and what this all looks like from inside the Fed. This podcast is supported by Fundrise. Buy low, sell high. It's easy to say, hard to do. For example, high interest rates are crushing the real estate market right now. Demand is

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This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. This is Marketplace. I'm Kyle Rizdal. Even though former President Trump appointed Jay Powell to be the chairman of the Federal Reserve, he has made clear, as we pointed out up at the top of the program, that he is no fan of the way Powell and the central bank have been running this economy,

and that in fact, he thinks he could do a better job. So the program today is in search of the answer to this question. What happens if the former president's attacks on the Fed and its independence actually work. Hi, how are you? Tom Kyristol, good to see you. How are you? Thanks for letting us intrude. We'll get off the front step. Tom Nichols is a staff writer at The Atlantic, professor emeritus of national security affairs at the Naval War College, and he's also done a lot of work about failures of democracy. I don't usually do this, but why do you think we're here?

That's a great question. Why are you here? Why are any of us here? I suspect you're here because you're trying to untangle an election that seems almost surreal 10 years into a new era of American politics. Yes, and we're a show on business and the economy. You are a national security, international affairs guy. Right.

Never this way and shall meet, except they really do meet, right? Because what happens in this economy depends in large degree on American democracy, our standing in the world, and our international relations. So my question is, as we approach this election now, ten years into this period, where is this democracy? I'm concerned about where we are because I think we have become untethered from reality about the things that people normally vote about. After 30 years of relative affluence, prosperity, I know people often don't think of it that way, but the reality is that we've actually lived

through a pretty remarkable time since the end of the Cold War, and yet we've become very detached from any kind of engagement with the end of the Cold War and yet we've become very detached from any kind of engagement with the issues and the real conditions around us that normally people would vote on and as a result I think it's you know we keep using the expression of vibes election but I think that's actually been going on for a long time and I think it's very unhealthy. There's a flip side to the what-if right? What if after January 6th and actual political violence and attacks by the former president on the democratic process, what if going after the independence of the Federal Reserve maybe

isn't all that dangerous? I think the American people don't understand the incredible danger of an American president saying, well, I should just be able to set interest rates. That's Soviet levels of government intervention. He has this kind of Moscow central planning, Brezhnevian understanding that I should be able to just set interest rates and tell the central bank what to do.

Then the rest of the world says, well, I guess the United States isn't really a functioning economy. It's just an autocracy where the value of goods and the value of the dollar are basically just set by this, you know, kind of ignorant authoritarian who wakes up and says, my poll numbers are down. Let's lower interest rates for a while. Every time I ask Chair Powell or a president of a regional Fed bank about politics or political pressure or whether they think about who's in the White House when making interest rate

decisions, literally every time I ask it, the answer is the same. We don't consider it at all. I should tell you we contacted the Fed for a comment for this story. The central bank pointed to statements from Chair Powell and previous Fed chairs Yellen and Bernanke and Greenspan about the importance of Fed policy independence. We've got those statements on our website. The Trump campaign didn't respond to multiple requests for comments. But this, how the Fed responds to political pressure is critical. So you should probably hear it for yourself.

This is Powell at his press conference in September, the meeting announcing the half percentage point rate cut. This is my fourth presidential election at the Fed. And you know, it's always the same. We're always going into this meeting in particular and asking what's the right thing to do for the people we serve. And we do that and we make a decision as a group and then we announce it. And that's always what it is.

It's never about anything else. Transcripts of Fed meetings are released five years after the fact. So we went through the transcripts that are available from the presidential elections in 2008, 2012, and 2016 to check that members really don't talk about politics. The people on the Federal Open Market Committee, of course, know that these transcripts are eventually going to be released. We searched for all the keywords you might imagine, Obama, Trump, Clinton, Romney, Republican Democrat senator, etc In 2008 we didn't find anything of note just lots of fed speak 2012 one mention of Romney and Obama more emphasis on the fed staying away from politics though than anything in

2016 committee members did mention that a change in presidential administration was coming and in the December meeting of that year, so after Trump was elected, they discussed how his agenda might affect the economy, things like new and higher tariffs or tax cuts. We did the work to check that FOMC members really don't tread into any political waters. And again, every president for the past 30 years, Clinton, Bush, Obama, and Biden, Republicans and Democrats both have stayed out of monetary policy. Every president except Trump. Hey, Professor Blinder, it's Kai Rizdal in Los Angeles. Sir, how are you?

Hello, Kai. I'm fine. How are you? I'm well. Sorry I'm late. I got delayed getting a cup of coffee, Kai. I'm fine. How are you? I'm well. Sorry I'm late. I got delayed getting a cup of coffee, to be honest with you. You're one minute late by my watch.

Let's do the proper idea here, shall we? I'm Alan Blinder, a professor of economics at Princeton University. And I think most remain to this interview. I was once the vice chairman of the Federal Reserve. We should say, just so you know, that Blinder is one of the 400 plus economists who signed a letter endorsing Kamala Harris for president. Blinder started at the Fed in 1994. Before that, he was on Clinton's Council of Economic Advisers.

When you were at the White House, what were your thoughts about the Federal Reserve? Our thoughts were basically to watch the Fed, worry about the Fed, and not say a word about the Fed. And this is, of course, to preserve Federal Reserve independence. People don't realize what a break from past history this was. In the 1992 election, Clinton running against George H.W. Bush, Bush was publicly critical of the Fed. He wanted the central bank to lower interest

rates faster. And in fact, years later, Bush blamed the Federal Reserve for his loss. But he never threatened to fire Alan Greenspan or said he should be in or consulted about Fed meetings or any of the other things that Trump is doing today. The Federal Reserve is designed to be, is supposed to be, an independent non-political agency and to a gratifying extent it is. And they make decisions on monetary policy on technocratic grounds. Now I'm a technocrat myself. I don't want to suggest that technocrats are always right. The Federal Reserve has made mistakes. It made a mistake in 2022, for example, waiting too long to start raising interest rates.

But politics played no role in that mistake and played no role in when the Fed plays no role when the Fed gets it right for the most part. Let's do the counterfactual then. What if it had been Donald Trump in the White House in 2021, 2022, as inflation really started getting going and the Fed, after having been late, as we've talked about, started really cranking interest rates higher? What do you think that would have looked like? Yeah, well, it's a very good question because he wouldn't have liked the

inflation that we were getting. Nobody liked the inflation. But the thinking then, it didn't happen actually, is if the Fed started raising interest rates a lot, that would at least slow down economic growth and might cause a recession. And no president wants a recession during his or her term of office. And so my guess is that he would have been pushing the Fed to stay easy even longer than it did. But that's only a guess, because there was this inflation problem. Yeah, let's call it an educated guess, right?

I mean, you've been around the block a couple of times. I have. Staying easy is Fed speak for blinders saying he believes Trump would have pushed the Fed to keep interest rates low, which had it happened, would almost certainly have sent inflation higher than the 9.1% it topped out at and would almost certainly have inflation well above where it is right now, which reminder is almost at that 2% target. The Fed has gotten the economy there by raising rates these past few years, making decisions

based on economic data and using the credibility it has, including admitting its mistakes, to convince the American public it was going to do what it said it was going to do. What happens if that reputation, if that credibility is shredded? What happens to the confidence in the Fed? What happens in the markets? What happens to some guy shoveling his driveway in the middle of January in Ames, Iowa? Well, the guy shoveling his driveway won't realize it, but he's probably hurt by the Fed's loss of credibility.

The first thing that would happen if the Fed really lost credibility, let's just imagine that some clown gets to be in charge of the Fed and starts behaving erratically and people don't know what in the world the Fed is up to and it's doing the wrong thing and so on. The first casualty of that will be inflationary expectations which are built into interest rates. This is key, inflation expectations.

We know that what consumers think prices are going to do can affect what prices actually do. The Fed thinks about that a lot, and those consumer expectations only stay anchored if people trust the Fed. So people start thinking inflation won't be 2%, it'll be 5% instead, or who knows where it'll be five percent instead or who knows where it'll be and that guy shoveling snow in Iowa if he wants to borrow in any way to buy a house to buy a car anything will be paying higher interest rates as the penalty as his

share of the penalty for the feds loss of credibility. The reason I wanted to do this story is that since January 6th, I have been on and off preoccupied with the idea of what happens to the institutions of this economy when the institutions of this democracy are under threat. And it was very present in my mind right after January 6th and then it faded because life goes on and now as the election gets closer obviously it's it's picking back up. And I guess I want to ask you the framing

question first. What happens to the institutions of this economy when the institutions of democracy are under some degree of threat Well, let me be specific about that Much as it would chagrin me and many other people but not all Americans Donald Trump might get elected president again If he gets elected president again, I think the political independence of the Federal Reserve goes right out the window. The premise of any what-if exercise, of course, is that it's hypothetical. Until it isn't. Our daily production team includes Andy Corbin, Lize Hasson, Maria Hollenhorst, Sarah Leeson, Sean McHenry and Sophia Terenzio. I'm Kyle Rizdal.

We will see you tomorrow, everybody. Hey everyone, I'm Rima Grace, host of This Is Uncomfortable, a podcast from Marketplace about life and how money messes with it. It's hard to believe, but we are somehow in our 10th season of the show. To celebrate, I sat down with the founding producer and we chatted about everything from the early days of the show and the terrible titles we almost named it, to what we've learned making This Is Uncomfortable. You'll also hear our favorite money tips from expert guests and how the show has helped some listeners make dramatic changes in their lives. You can hear this special episode of This is Uncomfortable wherever you get your podcasts.