Why Fed independence is crucial

Summary

Marketplace Podcast Summary: "Why Fed Independence is Crucial"

Podcast Information:

• Title: Marketplace
• Host: Kai Ryssdal
• Episode: Why Fed Independence is Crucial
• Release Date: October 28, 2024
• Description: Every weekday, host Kai Ryssdal helps listeners make sense of the day’s business and economic news. “Marketplace” delves beyond the numbers, providing context by engaging with CEOs, policymakers, and everyday individuals.

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Introduction

In the episode titled "Why Fed Independence is Crucial," host Kai Ryssdal explores the significance of the Federal Reserve's (Fed) independence in maintaining economic stability both domestically and globally. With the 2024 election looming, Ryssdal delves into the potential ramifications if the Fed's credibility and political independence were to be undermined, particularly in the context of former President Donald Trump's repeated criticisms and threats towards the institution.

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The Threat to Federal Reserve Independence

[00:38] Kai Ryssdal begins by posing a critical question: "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?"

Former President Donald Trump has been vocal about his dissatisfaction with Fed Chair Jerome Powell. [01:45] Trump stated:

"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 any decisions on that." [01:45]

This remark, made in March 2020, underscores Trump's persistent criticism of the Fed's decisions, particularly regarding interest rate changes.

[02:27] Trump continued his critique after the Fed's decision to cut interest rates by half a percentage point:

"It really is a political move. Most people thought it was going to 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 going to work because the inflation has been so bad. And think of this, he missed the inflation. They missed it. They missed the number." [02:27]

These comments reflect Trump's belief that the Fed's actions are politically motivated rather than based on economic data.

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Federal Reserve's Role and Importance

Ryssdal emphasizes the pivotal role of the Fed in setting interest rates and its broader impact on the economy:

"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." [01:57]

The Fed's independence ensures that its decisions are made based on economic indicators rather than political pressures, maintaining market stability and investor confidence.

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Expert Insights on Fed Independence

Wendy Edelberg – Brookings Institution

Wendy Edelberg, Director of the Hamilton Project and a Senior Fellow in Economic Studies at Brookings, provides a profound analysis of the implications of compromising Fed independence.

[04:36] Edelberg asserts:

"The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes." [04:36]

She elaborates on the global significance of the Fed:

"You would have the international financial system to worry about. I mean, the U.S. 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." [05:12]

Edelberg highlights three primary concerns if the Fed's independence is threatened:

1. Tariffs
2. Immigration
3. Destruction of the Fed's Independence

She emphasizes that the Fed's credibility is essential for maintaining low and stable inflation and maximum sustainable employment.

Tom Nichols – The Atlantic

Tom Nichols, a staff writer at The Atlantic and professor emeritus of National Security Affairs at the Naval War College, discusses the broader implications of undermining democratic institutions on economic policies.

[18:00] Nichols warns:

"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." [18:00]

He likens such actions to "Moscow central planning," highlighting the authoritarian implications of a president controlling monetary policy.

Alan Blinder – Princeton University

Alan Blinder, Professor of Economics at Princeton University and former Vice Chairman of the Federal Reserve, provides a historical and analytical perspective on the Fed's independence.

[22:43] Blinder states:

"The Federal Reserve is designed to be, is supposed to be an independent, non-political agency and to a gratifying extent it is." [22:43]

He acknowledges that while the Fed is not infallible:

"The Federal Reserve has made mistakes. It made a mistake in 2022, for example, of waiting too long to start raising interest rates." [22:43]

Blinder posits that the independence of the Fed has largely insulated it from political whims, allowing it to make decisions based purely on economic data rather than electoral motives.

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Consequences of Undermining the Fed

Ryssdal and the experts collectively illustrate the severe repercussions of eroding the Fed's independence:

1. Loss of Credibility: Without independence, the Fed's ability to manage inflation and stabilize the economy is compromised. As Edelberg warns:

   "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." [04:36]

2. Inflation Expectations: A loss of trust leads to unanchored inflation expectations, where consumers and businesses anticipate higher inflation, thereby perpetuating actual inflation.

   Blinder explains:

   "People start thinking inflation won't be 2%, it'll be 5% instead... 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." [25:43]

3. Economic Instability: The Fed may need to implement drastic measures, such as inducing a recession, to restore its credibility—a scenario fraught with hardship for the economy.

   Edelberg elaborates:

   "What people are going to start to think is <---> inflation is gonna remain high, and we're gonna 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 gonna get inflation back down to target." [11:56]

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Historical Context and Comparisons

Ryssdal provides a historical lens to underscore the importance of the Fed's independence. Comparing the present scenario to past presidential interactions with the Fed:

• Arthur Burns (Fed Chair from 1970-1978) experienced significant political pressure from President Nixon, particularly regarding interest rate cuts.
• Clinton, Bush, Obama, and Biden administrations have largely respected the Fed's autonomy, in stark contrast to Trump's approach.

Blinder reflects on past administrations:

"Now, 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." [23:25]

This historical respect for the Fed ensures a stable economic environment, fostering global confidence in U.S. financial markets.

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Potential Future Scenarios

Exploring the "what if" scenario where Trump's attempts to undermine the Fed succeed:

• Increased Inflation: Without independent monetary policy, inflation could spiral out of control as interest rates are manipulated for political gain rather than economic necessity.

  Blinder hypothesizes:

  "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." [24:18]

• Global Financial Turmoil: The U.S. Treasury market, being the cornerstone of global finance, could experience instability, impacting international economies reliant on it.

  Edelberg emphasizes:

  "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." [05:12]

• Erosion of Trust: Both domestic and international confidence in U.S. economic policies would wane, potentially leading to reduced investment and economic downturns.

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Conclusion

The episode "Why Fed Independence is Crucial" underscores the indispensable role of the Federal Reserve's autonomy in maintaining economic stability and global financial confidence. Through expert insights and historical context, Marketplace highlights the potential dangers of political interference in monetary policy. Preserving the Fed's independence is not merely a political matter but a cornerstone of a stable and prosperous economy. As the 2024 election approaches, the episode serves as a poignant reminder of the delicate balance between political leadership and independent economic institutions.

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Notable Quotes

• Donald Trump [01:45]: "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 any decisions on that."

• Wendy Edelberg [04:36]: "The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes."

• Tom Nichols [18:00]: "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."

• Alan Blinder [22:43]: "The Federal Reserve is designed to be, is supposed to be an independent, non-political agency and to a gratifying extent it is."

• Alan Blinder [25:43]: "People start thinking inflation won't be 2%, it'll be 5% instead... 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."

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Final Thoughts

The episode meticulously outlines the critical importance of maintaining the Federal Reserve's independence from political influence. By leveraging expert opinions and historical instances, Marketplace effectively communicates the high stakes involved in safeguarding this economic institution. The insights provided serve as an essential guide for listeners to understand the intricate balance between political leadership and independent economic policymaking.

Transcript

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[Kai Ryssdal]

If the Federal Reserve stops really being the Federal Reserve? From American public Media, this is Marketplace in Los Angeles. I'm Kyle Rysdal. It is Monday today, 28th 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?

[Donald Trump]

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 any decisions on that.

[Kai Ryssdal]

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.

[Donald Trump]

It really is a political move. Most people thought it was going to 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 going to work because the inflation has been so bad. And think of this, he missed the inflation. They missed it. They missed the number.

[Kai Ryssdal]

It's important to point out here that the Fed's not infallible. They've made mistakes, including in the Past few years being late on inflation. Chair Powell has admitted as much to me on this program. Here's one more from the former president.

[Donald Trump]

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.

[Kai Ryssdal]

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 enemy, Jay Powell or Chairman Xi? We should note Powell's political lineage for a second. He's a Republican, served in the George H.W. 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? 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.

[Wendy Edelberg]

The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes.

[Kai Ryssdal]

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.

[Wendy Edelberg]

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.

[Kai Ryssdal]

Wendy Edelberg is the director of the Hamilton Project and a senior fellow in Economic studies at Brookings.

[Wendy Edelberg]

You would have the international financial system to worry about. I mean, the U.S. 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.

[Kai Ryssdal]

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?

[Wendy Edelberg]

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.

[Kai Ryssdal]

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.

[Wendy Edelberg]

It is still worrying to think about some of the outcomes that could happen depending on the election.

[Kai Ryssdal]

Why is it worrying?

[Wendy Edelberg]

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.

[Kai Ryssdal]

Number one on Wendy's list is tariffs. Number two is immigration.

[Wendy Edelberg]

The third thing is worry that Trump is flirting with destroying the Fed's independence.

[Kai Ryssdal]

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 re election 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.

[Wendy Edelberg]

I had the utmost confidence in Janet Yellen as chair of the Federal Reserve. She's 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 she was.

[Kai Ryssdal]

Why? You just said she was the greatest thing since sliced bread.

[Wendy Edelberg]

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.

[Kai Ryssdal]

Fiscal policy, fiscal policy, things like tariffs and taxes, also the Inflation Reduction act and the bipartisan infrastructure law.

[Wendy Edelberg]

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.

[Kai Ryssdal]

Keeping elected politicians away from monetary Policy helps establish credibility for 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?

[Wendy Edelberg]

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.

[Kai Ryssdal]

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.

[Wendy Edelberg]

In the 70s and 80s, when the Fed didn't have a lot of credibility and, you know, Nixon was putting pressure on Burns.

[Kai Ryssdal]

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.

[Wendy Edelberg]

The US treasury market across the entire global financial system was in the single digits. Handful of trillion. No, a handful of trillion dollars.

[Kai Ryssdal]

Oh, sorry. Right, Gotcha.

[Wendy Edelberg]

That is now a $28 trillion market. And one of the reasons it's grown as significantly as it has is because all of these players across the international financial system are really confident in the Fed's ability.

[Kai Ryssdal]

That confidence would disappear if the Fed even appears to be making decisions on a president's behalf.

[Wendy Edelberg]

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 gonna remain high, and we're gonna 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 gonna get inflation back down to target. In this case, two. Not only are they gonna have to slow the economy with monetary policy, but they're actually gonna have to weaken the economy and pound it just for the purpose of convincing us that we're wrong.

[Kai Ryssdal]

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.

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Visit fidelity.com Wealth Investment Minimum Supply Fidelity Brokerage Services LLC Member NYSE, SIPC. This is Marketplace. I'm Kai Ryssdal. 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 independents actually work? Hi, how are you?

[Alan Blinder]

Tom.

[Kai Ryssdal]

Kai Rysdell. 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?

[Tom Nichols]

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.

[Kai Ryssdal]

Yes. And we're a show on business in the economy. You are a national security international affairs guy.

[Tom Nichols]

Right.

[Kai Ryssdal]

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 10 years into this period, where is this democracy?

[Tom Nichols]

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 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.

[Kai Ryssdal]

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. What if going after the independence of the Federal Reserve maybe isn't all that dangerous?

[Tom Nichols]

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 kind of ignorant authoritarian who wakes up and says, my poll numbers are down. Let's lower interest rates for a while.

[Kai Ryssdal]

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 decision, 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 comment, 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, at the Fed. And you know, it's always the same. We're always, 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 search 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 Rysdal in Los Angeles. Sir, how are you?

[Alan Blinder]

Hello, Kai. I'm fine, how are you?

[Kai Ryssdal]

I'm well. Sorry I'm late. I got delayed getting a cup of coffee, to be honest with you.

[Alan Blinder]

You're one minute late by my watch.

[Kai Ryssdal]

Let's do the proper ID here, shall we?

[Alan Blinder]

I'm Alan Blinder. I'm a professor of economics at Princeton University and I think most germane to this interview. I was once the Vice Chairman of the Federal Reserve.

[Kai Ryssdal]

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?

[Alan Blinder]

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.

[Kai Ryssdal]

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.

[Alan Blinder]

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, of 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.

[Kai Ryssdal]

Let's do the counterfactual then. What if it had been Donald Trump in the White House in 2021, 2022, as inflation really 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 will?

[Alan Blinder]

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.

[Kai Ryssdal]

Yeah, let's call it an educated guess. Right. I mean, you've been around the block a couple of times.

[Alan Blinder]

I have.

[Kai Ryssdal]

Staying easy is Fed speak for blinder, 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?

[Alan Blinder]

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.

[Kai Ryssdal]

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.

[Alan Blinder]

So people start thinking inflation won't be 2%, it'll be 5% 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 Fed's loss of credibility.

[Kai Ryssdal]

The reason I wanted to do this story is that since January 6, 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 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?

[Alan Blinder]

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.

[Kai Ryssdal]

The premise of any what if exercise, of course, is that it's hypothetical until it Our daily production team includes Andy Corbin, Lise Hassan, Maria Hollenhorst, Sarah Leeson, Sean McHenry and Sophia Terenzio. I'm Kai Ryssdal. We will see you tomorrow, everybody. This is apm. You turn to Marketplace for up to the minute news for stories that show you the connections between global events and your personal economy. And you're not alone. Marketplace is the most widely consumed business and economic news program in the country. We're proud to make fact based journalism freely accessible and Marketplace investors make it all possible. Your year end donation today will make a real difference in our nonprofit newsroom and in the lives of millions of Marketplace listeners every single day. So please contribute what you can [e-mail] donate.