The Drama at the Fed as It Debates Cutting Rates

Summary

Podcast Summary: The Drama at the Fed as It Debates Cutting Rates

Podcast: The Journal.
Hosts: Ryan Knudsen & Jessica Mendoza
Date: September 16, 2025
Main Guest: Nick Timiraos, Chief Economics Correspondent, The Wall Street Journal

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Overview: Episode Theme and Purpose

This episode explores the high-stakes decision facing the Federal Reserve as it debates whether to cut interest rates amidst conflicting economic signals. The conversation goes beyond economic fundamentals—delving into the mounting political drama, especially President Trump's attempts to influence the Fed’s makeup and direction. Listeners are guided through current economic uncertainties, the delicate balance between inflation and jobs, and the emerging political tension that threatens the Fed's long-standing independence.

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Key Discussion Points and Insights

The Fed’s Dilemma: Inflation vs. Jobs

• The Fed must choose between lowering rates to stimulate job growth or maintaining higher rates to combat persistent inflation.
  • Nick Timiraos uses a sports metaphor:

    "I always think of a soccer match where somebody's taking a penalty kick and the Fed is the goalie here and they have to decide are they going to dive to the left and address the risk of a weakening job market, or are they going to dive to the right and address the risk of higher, longer, more persistent inflation?" (00:19)

• Current inflation has ticked up to 3%, above the Fed’s 2% target, while payroll growth has notably slowed since May (05:17).
• The labor market appears stuck in a "slow to hire, slow to fire" state, where layoffs are not yet surging, but hiring has slowed (04:31).

Economic Policy Shocks: Trump Administration’s Influence

• Simultaneous policy actions are affecting the economy:
  • Reduced immigration and deportations are shrinking the labor pool.
  • New tariffs are increasing costs for businesses (03:18).
• Businesses are tentative, delaying hiring and investment due to uncertainty about input costs and tariff schedules.

Divisions Among Economists and Within The Fed

• No clear consensus on rate policy:
  • Some argue inflation has been above target for too long; the Fed must not risk further entrenchment of high inflation.
  • Others believe weakening labor market signals justify immediate rate cuts, viewing tariffs as one-time shocks (06:58).

Risks of a Wrong Move

• Cutting rates too much could lock in above-target inflation (07:39).
• Keeping rates high could risk tipping the labor market into a recession, given tariffs might squash demand regardless of monetary policy.

Political Pressure and Interference

• President Trump is overtly pressuring the Fed for rate cuts to lower government borrowing costs, disregarding traditional concerns about inflation (10:01).
  • Quote:

    "He wants the Fed to cut interest rates. He has a view that there isn’t going to be a real inflation problem. But we do have a budget deficit problem. So what Donald Trump wants is lower borrowing costs for the federal government." - Nick Timiraos (10:01)

• There’s a historical bias for easier monetary policy, as described by Alan Greenspan’s comment to Nick:
  • Quote:

    "In all of those years, do you know how many times somebody asked me to raise rates and how many times somebody asked me to lower rates? It was always in favor of lowering rates." (10:37)

The Erosion of Fed Independence

• Trump pushes to reshape the Fed Board by fast-tracking appointees friendly to his economic agenda, specifically the rapid confirmation of Stephen Miron.
• Miron’s unusual "on-leave" status from the White House creates ethical questions about conflicts of interest and leaks from confidential Fed meetings (12:59).
  • Quote:

    "...you shouldn’t have executive branch officials going into the Fed and then right back to the White House. How could anybody think that you’re going to be an independent voice when you have a job for the President waiting for you when this is all done?" - Nick Timiraos (13:33)

Attempts to Remove Dissenters

• Trump’s administration attempted (unsuccessfully, per a court) to fire Fed Governor Lisa Cook on allegations of mortgage fraud (15:33).
• Discussion on whether a few appointees can shift policy:
  • Direct influence is limited (one vote out of 12), but the real risk is the undermining of institutional norms and long-term independence (16:07).

Unprecedented Public Dissent

• Possible scenario: Trump-appointed governors may dissent from the expected modest rate cut, pushing for a larger reduction.
  • Quote:

    "It's almost as if you have to staple your dissent to your job application if you want to have that job application considered by the Treasury Secretary and the President." - Nick Timiraos (17:03)

The Historical Inflection Point

• The episode closes with reflection on the possibility that September 2025 could be viewed as a pivotal moment when the Fed’s independence began to erode:
  • Quote:

    "It's very possible we will look back at September 2025 and say, yep, that was the point at which the Fed began to behave in a different way. That the institutional norms that had protected the autonomy for the central bank to have some distance from the political process—that began to erode." - Nick Timiraos (17:36)

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Notable Quotes and Memorable Moments

• The Fed as Goalie Metaphor (00:19): “The Fed is the goalie here and they have to decide are they going to dive to the left and address the risk of a weakening job market, or are they going to dive to the right and address the risk of higher, longer, more persistent inflation?” – Nick Timiraos
• "Slow to Hire, Slow to Fire" (04:31): Describing the current labor market stasis.
• The Political Pull of Easier Policy (10:37): Story from Alan Greenspan on the relentless political pressure for lower rates.
• Independence Under Threat (13:33): Discussion about the risk of executive branch conflicts on the Fed board.
• Pivotal Moment in History (17:36): Reflection on the long-term implications of current events for Fed independence.

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Structured Timestamps for Important Segments

• 00:05 – 01:44: Setting the stage; the Fed’s central dilemma and the political context.
• 03:13 – 05:45: Current economic climate; labor market and business reactions to tariffs.
• 06:05 – 07:39: Inflation trends; divisions over what the Fed should do.
• 07:39 – 08:40: The two-sided risk of rates policy error.
• 09:47 – 11:09: Trump’s pressure on the Fed; the history of monetary policy bias.
• 11:42 – 12:54: Trump’s assertive moves to reshape the Fed’s board.
• 12:59 – 15:33: Miron’s unusual dual status and the threat to independence/confidentiality.
• 15:33 – 17:03: The Lisa Cook firing attempt and appointees’ influence.
• 17:31 – 18:13: Is this the moment the Fed’s independence starts to break down?

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Conclusion

This episode of The Journal. offers both a timely analysis of the forces shaping America’s monetary policy and a chilling look at how political maneuvering could permanently alter the Federal Reserve’s independence. Through accessible metaphors and deep historical context, Knudsen and Timiraos paint a portrait of an institution at a crossroads, with implications set to reverberate for years to come.

Transcript

[Ryan Knudsen]

The Federal Reserve, the country's central bank, is facing a difficult choice right now. Does it keep interest rates high to battle stubborn inflation, or does it lower interest rates in hopes of boosting a sluggish job market?

[Nick Timiraos]

I always think of a soccer match where somebody's taking a penalty kick and the Fed is the goalie here and they have to decide are they going to dive to the left and address the risk of a weakening job market, or are they going to dive to the right and address the risk of higher, longer, more persistent inflation?

[Ryan Knudsen]

Tomorrow, Fed Chairman Jerome Powell will announce which way the Fed is going, whether it will cut interest rates and if so, by how much, or whether it will hold them steady. But our colleague Nick Timirau says the factors at play aren't only economic. The Fed's meeting this week comes after months of efforts by President Trump to reshape the Fed in his image.

[Nick Timiraos]

It's taking place against a truly wild backdrop where the attendees at the meeting, you have one Fed governor that President Trump has tried to remove. You have a Trump advisor who is being hustled into the committee room by the Republicans in the Senate. So it's gone way beyond just Donald Trump yelling at Jay Powell towards the Trump administration actively trying to get into the building so that they can execute more influence on monetary policy.

[Ryan Knudsen]

Welcome to the Journal, our show about money, business and power. I'm Ryan KNUDSEN. It's Tuesday, September 16th. Coming up on the show, the future of interest rates and the future of the Fed.

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[Ryan Knudsen]

All right, Nick Timiros, how would you describe what's going on in the economy right now?

[Nick Timiraos]

So the way I think about it is the Trump administration is executing a number of policy experiments on the economy simultaneously and let's go through those. First, deportations and reduced immigration, that is reducing the potential pool of workers in the economy. Second, obviously, tariffs, they drive up costs for businesses. So all year long the question has been, how will this story play out? If inflation goes up and the job market weakens, which one happens first? Which one does the Fed react to more?

[Ryan Knudsen]

The Fed can't reduce inflation and boost the job market at the same time. It has to pick one. That's because the way to keep inflation in check is to slow down the economy with higher interest rates. But the way to boost the labor market is to do the opposite and stimulate the economy by lowering interest rates. So for the Fed, It's a catch 22, because doing one can hurt the other. Okay, let's talk about where things stand with the job market. I feel like I've been seeing a lot more headlines lately of companies talking about how they're not laying off workers, but they're pumping the brakes on projects and they're not really hiring new workers.

[Nick Timiraos]

What we've seen for the last two years and what we continue to see is a slow to hire, slow to fire economy. And the worry is, well, what happens if that breaks in favor of firing? Now to your question, we haven't really seen meaningful evidence of an increase in layoffs, but in the first week of September, there were more people who applied for jobless benefits. And if you were to see jobless claims continue to rise, that would be alarming because it would tell you that maybe we are moving out of this no hire, no fire labor market towards one where businesses are letting go of workers.

[Ryan Knudsen]

There was also a jobs report that came out recently that was weaker than people expected.

[Nick Timiraos]

Right. The payroll growth has slowed down a lot beginning in May. So maybe it's a coincidence that it happened right after these big broad tariff increases. But it also would support what you'd been hearing from businesses, which is we're just not going to do anything until we can see what our cost of goods are going to be, when we can see what the tariff schedule is going to be from the places where we source our goods or materials.

[Ryan Knudsen]

So on the one hand, the labor market is weakening, meaning the Fed might want to dive left and lower interest rates. But on the other hand, there's also a good reason to dive right and combat inflation. The Fed's goal is to keep inflation around 2%. But recently inflation started ticking up again and is now closer to 3%.

[Nick Timiraos]

The 3% inflation rate that we see right now, it's definitely moved in the Wrong direction from where it looked like it was going to go a year ago. But the much feared surge in prices that you thought maybe you were going to get after the Trump tariffs took effect, we haven't seen seen that businesses are more reluctant to pass along these price increases. So there are different schools of thought. Some economists say we're just going to see it later. Some economists are saying, you know what? If we haven't seen it by now, it means that the economy just cannot support the higher prices that businesses would like to charge because demand isn't there. They're going to take it in their margins. Profits will be reduced. So the inflation picture is a little bit more mixed.

[Ryan Knudsen]

Is there any kind of consensus among economists about what the Fed should do?

[Nick Timiraos]

There's division over what the Fed should do, both outside the Fed boardroom and inside the Fed boardroom. There are some people who say, look, inflation has been above your target for four going on five years now. The longer that happens, the more people will just expect inflation to be high. And so there are some people who say, you just can't take another risk on inflation after what we went through. There are other people who say, well, hold on. If the labor market's cooling and maybe weakening, then you should cut interest rates and you should focus on the labor market and you should treat the price increases from tariffs as something that won't be repeated.

[Ryan Knudsen]

What are the risks if the Fed gets this wrong?

[Nick Timiraos]

Well, there are risks on both sides, right? If they get it wrong because they cut too much and they stimulate demand and businesses are able to discover they can pass along more of these cost increases, then one risk would be we just have a 3% inflation rate going forward in this country that is higher than what we were used to before the pandemic. The risk on the other side is that you worry too much about inflation. You have PTSD from 2021 and 2022, and that was a very serious inflation problem. But the risk would be you're so focused on the potential inflationary impacts of tariffs that you ignore the ways that tariffs actually destroy demand. And even if the Fed cuts, you're not going to be able to stop that process of workers being fired, demand being reduced in the economy so fewer people have jobs, that, you know, that recessionary cycle takes hold.

[Ryan Knudsen]

But the economy isn't the only factor weighing on the Fed right now. There's also pressure from the President. That's next.

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[Ryan Knudsen]

There what does President Trump want from the Fed and why?

[Nick Timiraos]

Well, President Trump has made no secret. He wants the Fed to cut interest rates. He has a view that there isn't going to be a real inflation problem. But we do have a budget deficit problem. So what Donald Trump wants is lower borrowing costs for the federal government. And very importantly, we have to get interest rates lowered in our country. Our country is the hottest in the world right now.

[Ryan Knudsen]

Yeah. And politicians have always preferred lower interest rates. Right, because it stimulates the economy, makes it easier and cheaper to get mortgages and take out loans and. And voters like that.

[Nick Timiraos]

There's a bias always to having lower rates. The political establishment is always going to want to have stronger growth today, lower rates today. I had lunch with Alan Greenspan several years ago and we were talking about this and he was the fed chair for 19 years. And he said in all of those years, do you know how many times somebody asked me to raise rates and how many times somebody asked me to lower rates? It was always in favor of lowering rates. And that implies a very significant bias in favor of more accommodative monetary policy.

[Ryan Knudsen]

But the Fed isn't supposed to care about what politicians think, and it's not supposed to care about the budget deficit.

[Nick Timiraos]

There was an Agreement in 1951 between the Treasury Department and the Fed, which is what scholars refer to this as the Fed's independence. But it basically said, we're not going to take that into account when we set interest rates. The Fed has focused more on economic conditions, keeping inflation low. Having a strong economy is seen as something that will ultimately be, in the long run, interest of the U.S. government.

[Ryan Knudsen]

Since the start of his second term, Trump has been trying to get more of his appointees onto the Fed's Board of Governors to influence policy. The Federal Reserve has Seven governors on its board, all of whom sit on the 12 person Fed committee that sets interest rates. Trump appointed two of those governors during his first term, and recently he got an opportunity to appoint one more.

[Nick Timiraos]

So right after the Fed's last meeting, one of the Biden appointed Fed governors, Adriana Kugler, unexpectedly resigned. Her term was up in about six months, but she left early. She hasn't said why. And the Trump administration immediately turned to Stephen Miron, who is the chair of the Council of Economic Advisors.

[Ryan Knudsen]

Myron was confirmed by the Senate yesterday to serve out the remainder of Coogler's term, which ends next year.

[Nick Timiraos]

Myron's confirmation process is one of the fastest in the last 25 years. He's been confirmed in a matter of two weeks. And that was all done to make sure he would be at this Fed meeting where he could vote and begin to try to influence the policy conversations.

[Ryan Knudsen]

But even though Myron is now serving on the Fed's board, he's not planning to quit his job at the White House.

[Nick Timiraos]

So Myron has come up with an unusual arrangement. We haven't seen this in the modern history of the Fed where he would actually leave but not resign from the White House. So he would sort of be inactive or on leave from the Council of Economic Advisers for the duration of this stub term that he has at the Fed, because his term will expire in January. And at that point maybe he gets nominated to a new 14 year term or maybe he goes back to the White House.

[Ryan Knudsen]

This seems very unusual.

[Nick Timiraos]

It's very unusual. There are some Republicans who worked for other presidents who have said that this is completely inappropriate, that you shouldn't have executive branch officials going into the Fed and then right back to the White House. How could anybody think that you're going to be an independent voice when you have a job for the President waiting for you when this is all done? So it undermines the appearance that anybody would act completely independently in that job.

[Ryan Knudsen]

Myron told senators at his confirmation hearing that he would act independently.

[Nick Timiraos]

And in fact, Myron wrote a paper in 2024 where he said, where he sort of decried what he saw as a revolving door between the executive branch and the Fed. And he and his co author opposed a four year ban on Fed officials serving in executive branch jobs after leaving the Fed.

[Ryan Knudsen]

So is there a potential that the President would have leverage over him because Myron is still technically an employee of the executive branch?

[Nick Timiraos]

It raises all sorts of unusual questions. For example, is there going to be somebody now in the Fed meetings, who is able to report back to the Treasury Secretary or the White House about who said what at this meeting?

[Ryan Knudsen]

And those meetings are normally like closed door?

[Nick Timiraos]

Well, you know, yeah, they're supposed to be confidential. The deliberations are confidential. The transcripts to those meetings come out five years after the fact. And it's always possible that this has happened in the past, that other people have sort of disclosed. Well, here's where the pressure points are on the committee. But I've talked to a number of analysts in the last week who think this is just an even more ripe scenario now because he is still technically an employee of the executive branch.

[Ryan Knudsen]

The other thing Trump has done is, is try to fire another Fed governor named Lisa Cook. She's been accused of filing fraudulent information on a mortgage application. Her lawyers say she hasn't committed fraud and she sued, challenging her firing. Late Monday night, just hours before the beginning of the Fed meeting, an appeals court rejected Trump's request. How big of an influence do President Trump's appointees have over the final decision and whether or not the Fed raises or lowers interest rates? I mean, there are 12 people on this committee and they each just get one vote.

[Nick Timiraos]

That's a great question, because the truth is that one or two people are not going to change the decision here. So, you know, the issue is more, over the long run, what, what happens here if you change sort of the basic protocols and norms that have governed the central bank for the last 30 or 40 years. But for this particular meeting, what seems possible is that the Fed cuts interest rates by a quarter point. But two or maybe three Trump appointed Fed governors dissent in favor of a larger cut. Now, normally when you have three dissents, that's a big deal.

[Ryan Knudsen]

Nick says that in the past, if three governors dissented to a vote, it would be a sign that the Fed chair is losing support from the rate setting committee. But in this case, it's more likely a sign that these governors are simply auditioning to replace Powell when his term ends next year.

[Nick Timiraos]

You know, one analyst said to me, it's almost as if you have to staple your dissent to your job application if you want to have that job application considered by the Treasury Secretary and the President. What I'm saying is that this week will be more unusual than most and that the dissents that you see, if you see any this week, may have other factors beyond the Fed chairs losing control of the interest rate setting committee.

[Ryan Knudsen]

So how big of a moment is this for the Federal Reserve right now?

[Nick Timiraos]

It's very possible we will look back at September 2025 and say, yep, that was the point at which the Fed began to behave in a different way. That the institutional norms that had protected the autonomy for the central bank to have some distance from the political process that that began to erode. It's entirely possible you will look back at this time and say that was how it happened.

[Ryan Knudsen]

That's all for today. Tuesday, September 16 the Journal is a co production of Spotify and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts throughout every weekday afternoon. Thanks for listening. See you tomorrow.

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