Can the Federal Reserve stay independent?

Summary

Podcast Summary: The Indicator from Planet Money Episode Title: Can the Federal Reserve Stay Independent? Host: Waylon Wong & Darian Woods Release Date: March 4, 2025

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Introduction

In this episode of The Indicator from Planet Money, hosts Waylon Wong and Darian Woods delve into the implications of recent executive orders signed by President Trump, specifically focusing on the future independence of the Federal Reserve and the ambitious cost-cutting measures spearheaded by Doge. The discussion underscores the delicate balance between governmental oversight and the autonomy of key financial institutions.

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Executive Orders and Federal Reserve Independence

Waylon Wong opens the conversation by highlighting President Trump's prolific signing of executive orders, noting, "That's more than any president this early in their term" (00:15). The focus narrows to two pivotal orders impacting the economy:

1. Federal Reserve Oversight: Trump’s executive order aims to tighten control over how agencies, including the Federal Reserve, spend and regulate. However, it explicitly excludes the Fed's role in monetary policy—specifically, the raising and lowering of interest rates to combat inflation and protect jobs.

2. Cost-Cutting Measures by Doge: The discussion transitions to Doge’s aggressive attempts to reduce federal spending, which, according to the hosts, are unlikely to significantly impact the overall federal budget.

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Analysis of Federal Reserve’s Dual Roles

Waylon Wong outlines the Federal Reserve's two primary responsibilities:

• Monetary Policy: Managing the money supply to balance inflation and unemployment (02:05).
• Bank Regulation: Supervising and ensuring the stability of the financial system (02:21).

These functions are traditionally performed independently of political influence, maintaining the Fed's autonomy from the legislative and executive branches.

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Implications of the Executive Order on the Fed

Darian Woods elaborates on the executive order, explaining that while it targets the Fed’s regulatory functions, it preserves its monetary policy independence. Catherine Judge, a law professor at Columbia University, provides insight, stating, "There is an effort to signal, look, we don't want to mess with monetary policy, so it seeks to provide a little bit of calm and status quo maintenance" (03:11).

Judge further emphasizes the risks of diminishing the Fed's independence, noting, "Trump doesn't want to stoke fears that we're going to have persistent inflation by changing the leadership structure of the Fed or his control over the Fed in ways that would give him the ability to dictate interest rates" (03:30).

Research supports the notion that less independent central banks are prone to higher inflation rates, underscoring the importance of the Fed's autonomy in monetary decisions.

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Potential Challenges and Questions

The executive order raises critical questions about the practical division of responsibilities:

• Intervention in Financial Crises: How will the Fed’s ability to act swiftly during financial downturns, such as the 2023 Silicon Valley Bank troubles, be affected? Darian Woods asks, "Would those decisions now be subject to White House review?" (04:05).

• Maintaining Credibility: Catherine Judge warns, "So the core challenge is you have these individuals who are playing multiple rules, and how credible is it that they are going to maintain independence on one front and not others?" (04:30).

The tension between political oversight and institutional independence has been evident since Trump's election, with increasing scrutiny over Fed Chair Jerome Powell’s decisions. Powell has reaffirmed his commitment to maintaining the Fed's autonomy, stating, "What we're going to do at the Fed is keep our heads down and keep working" (05:09).

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Cost-Cutting Efforts by Doge

Parallel to the Fed's oversight, the episode examines Doge’s efforts to reduce federal spending:

• Ambitious Goals: Doge aims to trim at least $1 trillion from the federal budget, a target that far exceeds the verified savings of just over $2 billion (07:26).

• Implementation Challenges: Missteps have already occurred, such as the erroneous firing and rehiring of critical employees at the FDA and the National Nuclear Security Administration (06:59).

Jessica Riedel from the Manhattan Institute critiques Doge’s approach, comparing it to an irresponsible spender: "I'm a fiscal conservative... but it has to be done well and competently" (07:16). She highlights that the majority of federal spending—75%—is allocated to entrenched programs like Social Security, Medicare, Medicaid, Defense, veterans, and interest, leaving little room for impactful cuts.

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Political and Legislative Hurdles

While Congress holds the power of the purse, the Trump administration’s executive actions challenge this traditional dynamic. Despite Republican control aligning with Doge’s cutback initiatives, Jessica Riedel points out the improbability of significant deficit reduction without addressing major entitlement programs: "Most of that has been taken off the table by Trump and Republicans, and they're not going to be able to really do much on the deficit until they do hit those programs" (08:20).

Moreover, proposals like extending Trump's 2017 tax cuts, which include substantial Medicaid reductions, are projected to increase the deficit by approximately $350 billion annually, according to Riedel (08:54).

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Legality and Future Prospects

The legality of Doge’s sweeping spending cuts remains uncertain. Historically, Congress has regulated federal budgets, but the Trump administration’s challenges to this process introduce potential legal conflicts. Moreover, with Fed Chair Jerome Powell’s term expiring next year, any shift in monetary policy direction by the administration would likely coincide with new leadership (05:56).

Elon Musk, representing Doge, defends the agency’s actions on Joe Rogan's podcast, emphasizing accountability and prompt corrective measures: "If Doge makes a mistake, they would quickly fix it. But he said they need to act fast to, quote, stop wasting billions of dollars of taxpayer money" (09:06).

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Conclusion

The episode underscores a pivotal moment for the Federal Reserve’s independence amidst presidential executive orders and aggressive federal spending cuts by Doge. While monetary policy remains insulated, regulatory oversight and large-scale budget reductions present significant challenges that could reshape the financial landscape. The interplay between political intent and institutional autonomy will be crucial in determining the effectiveness and credibility of these measures moving forward.

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Notable Quotes:

• Waylon Wong: "That's more than any president this early in their term." (00:15)
• Catherine Judge: "Trump doesn't want to stoke fears that we're going to have persistent inflation by changing the leadership structure of the Fed or his control over the Fed in ways that would give him the ability to dictate interest rates." (03:30)
• Jerome Powell: "What we're going to do at the Fed is keep our heads down and keep working." (05:09)
• Jessica Riedel: "Most of that has been taken off the table by Trump and Republicans, and they're not going to be able to really do much on the deficit until they do hit those programs." (08:20)

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Timestamp References:

• Clickable links (e.g., 00:15) are placeholders and should link to the respective timestamps within the podcast player.

Transcript

[NPR]

Npr.

[Waylon Wong]

This is the indicator from Planet Money. I'm Waylon Wong.

[Darian Woods]

And I'm Darian Woods.

[Waylon Wong]

Okay, here is an indicator for you, Darian76. That's how many executive orders as of this recording, President Trump has signed so far. That is more than any president this early in their term.

[Darian Woods]

He has been spilling the presidential ink and as we know, many of these orders will be tied up in court for the foreseeable future. But we want to focus on two of these executive orders as they relate to the economy.

[Waylon Wong]

Today on the show, what an executive order means for the future independence of.

[Darian Woods]

The Federal Reserve and why the Doge cost cutting spree is not likely to make much of a dent in federal spending.

[Waylon Wong]

That's coming up after the break.

[NPR]

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[Waylon Wong]

The Federal Reserve has two main jobs. The first one is what we hear about most of the time, making sure the amount of money flowing through the economy is just right, making sure there's not too much inflation or unemployment. That's what wonks call monetary policy.

[Darian Woods]

The other main job is keeping banks running smoothly. And it does this by regulating and supervising the financial system. Both of these jobs are done at arm's length from Congress or the president. You know the Fed is independent.

[Waylon Wong]

Trump signed an executive order in mid February to make sure agencies follow the president's priorities. It put tighter control on how these agencies spend and regulate. And it applied to agencies like the securities and Exchange Commission, the Federal Trade Commission and the Federal Reserve.

[Darian Woods]

Now there's one big Asterisk here. The executive order says it only applies to the Federal Reserve's role in safeguarding the financial system. It doesn't apply to the Fed's raising and lowering of interest rates to fight inflation and protect jobs. You know, monetary policy. Catherine Judge is a law professor at Columbia University.

[Catherine Judge]

There is an effort to signal, look, we don't want to mess with monetary policy, so it seeks to provide a little bit of calm and status quo maintenance.

[Waylon Wong]

Catherine says it's widely accepted that less independent central banks end up with higher inflation. Research backs this up.

[Catherine Judge]

Trump doesn't want to stoke fears that we're going to have persistent inflation by changing the leadership structure of the Fed or his control over the Fed in ways that would give him the ability to dictate interest rates.

[Darian Woods]

The evidence is less clear about the effects of having the Fed's bank supervision and regulation role under the grip of politicians. And so it makes sense that President Trump specifically carved out the Fed's monetary policy as staying independent. But the big question is how this division would work in practice.

[Waylon Wong]

It also raises questions over how the Fed might intervene when something goes wrong. For example, when Silicon Valley bank ran into financial trouble in 2023, the Fed stepped in to lend it money. Would those decisions now be subject to White House review?

[Darian Woods]

Catherine says the problem with this approach is if the White House begins to meddle in some functions of the Fed, it would undermine other decisions made by the individuals at the Fed.

[Catherine Judge]

So the core challenge is you have these individuals who are playing multiple rules, and how credible is it that they are going to maintain independence on one front and not others?

[Waylon Wong]

This tension has been apparent since the election of Donald Trump. The President said in January the Fed was doing a terrible job on bank regulations. The Fed's top bank enforcer, Michael Barr, has also stepped down. And at the same time, Fed Chair Jerome Powell has been fielding more questions lately over whether his decisions on interest rates will be influenced by Trump or, for that matter, Elon Musk. Here's what Powell told a House committee last month about potential executive branch interference.

[Elon Musk]

What we're going to do at the Fed is keep our heads down and keep working, wait to see what new policies emerge, and trying to make a thoughtful, sensible set of policies on our part once we understand the implications of those.

[Darian Woods]

Classic Powell keeping his head down, doing the work.

[Waylon Wong]

Please don't bother me.

[Darian Woods]

I would not expect anything less from him. You know, we reached out to the White House to ask how this division would be managed. According to a senior administration official, the Office of Management and Budget will oversee all the Fed's regulations not related to monetary policy. We also asked if it could erode the credibility of the Fed's decisions to raise or lower interest rates. The same statement said no. And to quote, include that accusation in your story would not be accurately reporting the executive order.

[Waylon Wong]

Jerome Powell's term as chair expires next year. So if Trump wants to go in a different direction on monetary policy, that would be his earliest opportunity.

[Darian Woods]

The next executive order. We've been talking about this one a lot on the indicator recently is Doge Trump signed this executive order on his first day in office, the Department of Government Efficiency, which, as we need to keep reminding people, is not actually a department. The order says Doge will, quote, modernise federal technology and software to maximise government efficiency and productivity. And as we've seen over the last couple of weeks, that has translated into a lot of federal workers losing their jobs.

[Elon Musk]

This is the chainsaw for bureaucracy.

[Waylon Wong]

That's Elon Musk, heard here brandishing a chainsaw at cpac, the annual conference that draws conservative activists and officials. Musk, of course, is Doge's de facto leader. He's appeared in front of Trump's cabinet to explain his cost cutting efforts, and estimates vary, but more than 30,000 federal employees have been laid off so far.

[Darian Woods]

Doge has also mistakenly fired, then rehired critical employees at the Food and Drug Administration and the National Nuclear Security Administration.

[Waylon Wong]

Jessica Riedel is with the Center Right Manhattan Institute and has been writing about budgets and spending for over two decades.

[Jessica Riedel]

I'm a fiscal conservative. I have written 600 reports on how to cut spending over the past quarter century, but it has to be done well and competently.

[Waylon Wong]

Jessica says that has not been the case with Doge. Musk has made a goal of trying to trim at least $1 trillion from the budget that regularly runs into the red right now. Doge's official website claims they've saved just over $100 billion, but NPR reported it could only verify a little over $2 billion in savings.

[Darian Woods]

So it's early days. Yes, but there is still $998 billion to go. Jessica says the bulk of the government's 6.7 trillion in annual spending isn't even being scrutinized by Doge.

[Jessica Riedel]

75% of all federal spending goes to six Social Security, Medicare, Medicaid, Defense, veterans and interest.

[Waylon Wong]

And by interest, she means the cost of borrowing, which has also been rising for the government, came close to a trillion doll year.

[Jessica Riedel]

Most of that has been taken off the table by Trump and Republicans, and they're not going to be able to really do much on the deficit until they do hit those programs.

[Waylon Wong]

While Social Security and Medicare are politically almost untouchable, Congressional Republicans do appear to be going after at least one of these programs, and that is Medicaid, the health insurance program for low income Americans and people with disabilities. Their latest proposal to extend Trump's 2017 tax cuts would likely include steep cuts to Medicaid, potentially leaving millions without health care.

[Darian Woods]

And even if these spending cuts do pass, Jessica estimates the Republicans bill, which includes tax cuts, will increase the deficit by an average of about $350 billion a year.

[Jessica Riedel]

I compared this to congressional Republicans as the irresponsible husband going to buy a $250,000 Ferrari and put it on the family credit card, and Doge is just the $2 off gas card he uses on the way there.

[Darian Woods]

The question is, can Doge actually do all this legally? Historically, Congress has had the power of the purse, but the Trump administration is challenging this. Either way, the Republicans controlling Congress right now seem to be on board with the cutbacks. Still, Jessica says it will be hard to make those cuts. On Friday, Musk appeared on Joe Rogan's podcast to defend Doge's work against mounting.

[Elon Musk]

Critic which of these sort of waste slash fraud things are wrong? Which line? Explain that line to the public. They won't be able to.

[Waylon Wong]

Both NPR and the New York Times have pointed to specific mistakes in Doge's accounting. For example, Doge claimed savings on a Coast Guard contract that ended in 2005 and a national Institutes of Health contract that's still active. For his part, Musk told Rogan that if Doge makes a mistake, they would quickly fix it. But he said they need to act fast to, quote, stop wasting billions of dollars of taxpayer money. This episode was produced by Julia Richie with engineering by Gilly Moon. It was fact checked by Sierra Juarez. Kicking Canon is our show's editor and the indicator is a production of NPR.

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