It's hard out there for a Fed chair

Summary

Podcast Summary: "It's Hard Out There for a Fed Chair"

Podcast: The Indicator from Planet Money
Host: Waylon Wong and Darian Woods
Episode Title: It's Hard Out There for a Fed Chair
Release Date: May 8, 2025

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Introduction: The Federal Reserve’s Current Stance

In the episode titled "It's Hard Out There for a Fed Chair," hosts Waylon Wong and Darian Woods delve into the recent decision by the Federal Reserve (Fed) to keep interest rates unchanged. Released on May 8, 2025, the episode explores the implications of this decision amidst a solid labor market and uncertain economic forecasts.

Key Points:

• Interest Rates Unchanged: The Fed has opted to maintain current interest rates, citing a robust labor market but expressing increased uncertainty about the broader economic outlook. (Darian Woods, 00:15)
• Jerome Powell’s Remarks: Fed Chair Jerome Powell highlighted that sustained tariffs could lead to higher inflation and unemployment, alongside slowed economic growth. (Waylon Wong, 00:29)

Trump’s Ongoing Criticism of Jerome Powell

President Donald Trump has consistently criticized Powell, both during his first presidency and beyond. The episode underscores the tension between the White House and the Fed Chair, emphasizing how Trump's demands for lower interest rates clash with the Fed's mandate.

Notable Quotes:

• Trump’s Discontent: "He just doesn't like me because I think he's a total stiff." (Darian Woods, 00:39)
• Powell’s Firm Stance: "If I want him out, he'll be out of there real fast." (Waylon Wong, 03:08)

Discussion:

• Trump has historically pushed for lower interest rates to stimulate the economy, accusing Powell of being sluggish or politically motivated in his rate adjustments. (Waylon Woods, 04:00)

The Importance of Central Bank Independence

Economist Chris Hughes provides an in-depth analysis of the Fed's institutional framework, emphasizing the critical balance between independence and insulation from political pressures. He argues that while the Fed operates independently, it remains mindful of the political and economic environment.

Key Insights:

• Institutional Design: The Fed is structured to be insulated from immediate political changes, allowing it to make decisions based on long-term economic health rather than short-term political gains. (Chris Hughes, 04:09)
• Independence vs. Insulation: Hughes clarifies that independence doesn’t mean the Fed ignores Congress or the executive branch; rather, it operates with a degree of separation to maintain stability. (Chris Hughes, 05:03)

Supporting Evidence:

• Historical Context: Since World War II, every Fed Chair has faced criticism from the executive branch, highlighting a longstanding tension between the Fed and the President. (Waylon Wong, 03:15)

Legal Protections for the Fed Chair

The episode explores the legal safeguards that protect Fed Chairs like Jerome Powell from being dismissed by the President without just cause. This protection is rooted in a Supreme Court precedent, ensuring the Fed's operational integrity.

Key Points:

• Humphrey's Executor v. United States (1935): This landmark case established that the President cannot fire Fed officials without cause, typically defined as negligence or malfeasance. (Darian Woods, 06:00)

Notable Quotes:

• Chris Hughes on Legal Protections: "It's the law." (Waylon Wong, 06:59)

Current Threats:

• Recent Firings: The Trump administration has recently dismissed officials from other agencies like the FTC and NLRB, challenging the legal protections that should also apply to the Fed Chair. (Chris Hughes, 07:49)

Potential Scenarios and Implications

The hosts and expert Chris Hughes discuss possible outcomes if the Trump administration decides to challenge Powell’s position, considering both legal battles and market reactions.

Possible Outcomes:

1. Legal Showdown: If Powell chooses to defend his position, it could result in a significant legal conflict, potentially destabilizing financial markets. (Darian Woods, 08:44)
2. Peaceful Transition: Powell may complete his term without interference, allowing for a smooth handover to the next Fed Chair as per tradition. (Chris Hughes, 09:18)

Market Considerations:

• Financial markets, often referred to metaphorically as the "fourth branch of government," play a crucial role in responding to political instability within the Fed. Turmoil could lead to increased market volatility, particularly in bond markets. (Waylon Wong, 09:46)

Conclusion: Upholding Fed Independence

The episode concludes by highlighting the widespread support for maintaining the Fed’s independence from political interference. Experts, economists, and financial institutions overwhelmingly advocate for the Fed’s autonomy to ensure economic stability and credibility.

Final Thoughts:

• Widespread Consensus: There is a strong belief among financial leaders and academics that upholding the Fed's independence is essential for controlling inflation and promoting sustained economic growth. (Darian Woods, 09:28)
• Historical Precedent: The episode underscores that historical precedents and legal frameworks are in place to protect the Fed Chair from arbitrary dismissal, ensuring the institution's ability to function effectively despite political pressures.

Notable Quote:

• Chris Hughes on Presidential Relations: "Listen, lots of presidents haven't liked their Fed chairs. What you do is you wait until their term is up, you say, thank you very much for your service, and then you appoint the person that you want." (Chris Hughes, 09:28)

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Additional Information

Production Credits:

• Producer: Julia Ritchie
• Engineering: Sina Lofredo
• Fact-Checker: Sierra Juarez
• Editor: Kate Concannon
• Indicator Production: NPR

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This episode provides a comprehensive analysis of the intricate relationship between the Federal Reserve and the executive branch, particularly under President Trump's administration. By combining expert insights with historical context, The Indicator from Planet Money offers listeners a thorough understanding of the challenges faced by Fed Chairs and the broader implications for economic policy and market stability.

Transcript

[NPR]

Npr.

[Waylon Wong]

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

[Darian Woods]

And I'm Darian Woods. Yesterday, the Federal Reserve decided to leave interest rates unchanged. The bank said the labor market is still solid, but it said there is more uncertainty about the economic outlook.

[Waylon Wong]

Fed Chair Jerome Powell also said that if the announced tariffs remain in place, there's likely to be higher inflation and unemployment, plus a slowdown in growth.

[Darian Woods]

Powell signaled that the Fed is in no hurry to take action. This stance is unlikely to sit well with President Trump. He wants the Fed to cut rates, and his animus towards Powell is well known. Take these comments in an interviewed ad over the weekend. You know, he just doesn't like me because I think he's a total stiff.

[Chris Hughes]

And, you know, it's just one of those things.

[Waylon Wong]

These insults echo the verbal diatribes that Trump made against Powell during his first presidency. Today on the show, an economist and Fed watcher tells us why Trump's attacks on the Fed chair represent a greater threat than the first time around.

[Liz Ann Saunders]

This message comes from NPR sponsor Charles Schwab with its original podcast on Investing. Each week, hosts Liz Ann Saunders, Schwab's chief investment strategist, and Cathy Jones, Schwab's chief fixed income strategist, along with their guests, analyze economic developments and bring context to conversations around stocks, fixed income, the economy and more. Download the latest episode and [e-mail] oninvesting or wherever you get your podcasts.

[NPR]

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[Waylon Wong]

A certain morning routine that goes something like this.

[Chris Hughes]

I try to like make a cup of coffee and spend about five whole minutes not looking at my phone before I sit down. So I try to have five minutes of sanity, but every morning it never stops.

[Waylon Wong]

Chris is an economist and writer. He's also a big Federal Reserve history buff. And so lately, when those five minutes of sanity are up and he ventures a peek at his phone, he's Scanning the economic headlines, looking for news on the Fed.

[Darian Woods]

Like last month when Trump told reporters he wasn't happy with Jerome Powell. If I want him out, he'll be out of there real fast.

[Waylon Wong]

Believe me, if I want him out, he'll be out of there real fast. Chris says just about every Fed chair has drawn criticism from the executive branch since World War II. This has been especially true of Powell, who Trump picked for the position.

[Darian Woods]

And remember, the Fed's job is not to do whatever presidents want. It has a mandate from Congress to keep inflation in check and promote maximum employment. And one of the Fed's most important tools here is setting interest rates.

[Waylon Wong]

Now, interest rates have been Trump's big grievance with Powell going back to his first presidency. Trump wants lower interest rates to stimulate the economy, and he accuses Powell of being too slow on cutting rates or only delivering rate cuts to help Democratic politicians.

[Darian Woods]

Trump's complaints about Powell are basically the same as they were during his first presidency. Still, Chris says, this time feels different.

[Chris Hughes]

This is not just pressure from the White House. This is a threat to the very nature of the institutional design. And so that's what makes this moment different.

[Darian Woods]

Yeah. So institutional design, as in how the Fed was set up by Congress, Congress.

[Chris Hughes]

Is its boss, and Congress has decided that the president should appoint the chair every four years. And so the president has some ability to direct its operations, but as an institution chartered by Congress, Congress has also decided that it needs to be insulated from the ups and downs of the political environment, so that when a president, for instance, wants looser monetary policy, the Fed does not need to immediately respond. I think that institutional design really matters. I think of it more as insulation, to be honest, than independence per se.

[Waylon Wong]

What's the difference there, and why is it important to you?

[Chris Hughes]

Well, I think independence conjures up this idea. The Fed's going to do what the Fed's going to do. It doesn't really care about Congress. It doesn't really care about the executive branch. That's not consistent with the facts of history. You can see in their transcripts from, you know, the 1950s to the contemporary environment that we live in, that they are thinking about how their monetary policy will dovetail or be in conflict with what Congress is doing, with what the White House is doing, how it's going to look and seem to financial analysts, to the media, to voters, and so independents suggests they're on some other planet or the moon or something. And I don't think that's right.

[Darian Woods]

And whether you call it independence, or insulation. The consensus is that this relationship is vital for a well functioning economy. Academic research shows that central bank independence is correlated with lower inflation.

[Waylon Wong]

There's also the matter of the law. Powell has said the President is not legally permitted to fire him. Chris says this is because the law only allows the Fed Chair to be fired for cause. And that's generally interpreted to mean really bad, bad behavior like negligence or malfeasance.

[Darian Woods]

The precedent for this legal protection actually dates back to a 1935 Supreme Court case. It's called Humphrey's Executor v. United States, or Humphrey's Executor for short. Humphrey was an FTC commissioner who President Roosevelt tried to fire.

[Chris Hughes]

The Supreme Court was clear that the President can't do that. Congress has decided that this institution has leaders that are appointed by the President but cannot be fired unless there has been negligence or some kind of abuse of power or something that rises to the four cause standard. And that's the law.

[Waylon Wong]

And that's basically the guardrail we have against Powell just being kind of fired on a whim.

[Chris Hughes]

It's the law.

[Waylon Wong]

I mean, is there a case to be made if you were so inclined to say that Powell's leadership of the Fed has been negligent? I'm trying to imagine how you might try to spin this to make it fit within the bounds. You're shaking your head.

[Chris Hughes]

Well, I think the use of the word spin is the operative one. I mean, they might try to spin it in all kinds of different ways. But I think it's quite clear that folks inside the building at the Fed do not think that Powell has made any mistakes that would rise to the foreclos standard. I think folks in Congress for the most part don't think that. Economists certainly don't think that. People on Wall street certainly don't think that. I could imagine the White House trying to develop a spin to use that wor to make that case. But I think it would be Orwellian if they did.

[Darian Woods]

What does worry Chris is that the Trump administration is now challenging this legal protection. It's fired other agency officials whose jobs are supposed to be shielded in the same way as Powell's. And these people include a Democratic member of the National Labor Relations Board and two Democratic members of the Federal Trade Commission.

[Chris Hughes]

These are folks who can only be fired for cause. It's in the law, in the FTC act, for instance, and that is also true in the Federal Reserve Act. And so now there's actually a fact pattern of him just ignoring the law. And so it feels much more real that he might do that at any point.

[Waylon Wong]

The firings of the FTC and NLRB officials are now moving through the legal system. The Department of Justice is arguing that this legal precedent from 1935 prevents the President from adequately supervising supervising officials who execute laws.

[Darian Woods]

Back in 2018, Powell reportedly said that if Trump were to fire him, he would personally spend his last nickel fighting Trump to retain the Fed's independence. If Powell feels the same way today, that could lead to a messy legal showdown that would cause upheaval in financial markets.

[Waylon Wong]

The calmer scenario is that Trump sticks to his most recent public statement that he has no intention of firing Powell. The Fed chair has just a year left in his term. Chris says the rational thing for the President to do would be to let Powell just finish it out.

[Chris Hughes]

Listen, lots of presidents haven't liked their Fed chairs. What you do is you wait until their term is up, you say, thank you very much for your service, and then you appoint the person that you want.

[Darian Woods]

So laws are one thing, but I think it's worth pointing out that whether it's Wall street or academic economists or Washington advisors, there is a huge groundswell of people who believe in the independence of the Fed. And so that is one thing, keeping Jerome Powell in their job.

[Waylon Wong]

Yeah, I mean, we've seen what happens when markets get spooked, especially bond markets. I mean, the administration responds, right? So, yeah, that might be at work here, too.

[Darian Woods]

The fourth branch of government, the market.

[Waylon Wong]

Oh, no. Yeah. Like, who needs. Who needs the media? We just have financial markets.

[Darian Woods]

People thought it was media. No, it's Mr. Market.

[Waylon Wong]

This episode was produced by Julia Ritchie with engineering by Sina Lofredo. It was fact checked by Sierra Juarez. Kate Concannon edits the show and the indicators of production of npr.

[NPR]

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[Liz Ann Saunders]

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