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.

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.

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.

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.

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.

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]

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.

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.

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.

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."

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.