A Primer On The Federal Reserve's Independence

Summary

Throughline (NPR)

Episode: "A Primer On The Federal Reserve's Independence"

Release Date: August 26, 2025
Hosts: Rund Abdelfatah, Ramtin Arablouei
Guests/Featured Voices: Darian Woods, Wayland Wong, Carola Binder (Economist, UT Austin), Carolina Gariga (Political Scientist, University of Essex), Gina Smilek (NYT Reporter & Author), Jerome Powell (Fed Chair), Catherine Judge (Professor, Columbia Law)

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Overview

This episode explores the complex history and critical importance of the Federal Reserve's independence—why central banks are insulated from political meddling, how that wall has both wavered and held, and why current political pressure could transform the institution’s role in the U.S. economy. Using expert interviews, historical context, and recent events—including pressures from President Trump—the episode unpacks what’s at stake when the central bank's autonomy is challenged.

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Key Discussion Points and Insights

1. What Does the Federal Reserve Do?

• Mandate: The Federal Reserve’s dual mission is to keep prices stable (fight inflation) and keep jobs plentiful.

  • "The Fed can do things like change interest rates to address inflation. Raising interest rates can bring down prices, but could also make new mortgages more expensive." – Darian Woods [04:20]

• Unpopularity of Actions: Moves like raising rates are often politically unpopular because they can slow the economy or increase unemployment.

  • "Lower interest rates, maybe they boost the economy right now, but in the longer run maybe lead to inflation." – Carola Binder [04:47]

2. Why Independence is Crucial

• Shield from Short-Term Political Pressure: Politicians seeking re-election tend to favor quick economic boosts, which can be damaging long-term.

  • "If their goal is to get elected... they’re not going to worry about the long run consequences of their policy actions." – Carola Binder [04:47]

• Democratic Accountability: While the Fed isn’t totally removed from oversight—the president appoints board members and goals are set by Congress—its day-to-day decisions are intended to be free from political directives.

3. Historical Origins of Independence

• The 1951 Treasury-Fed Accord: Ended direct White House control, allowing the Fed to focus on monetary policy.

  • "So what's called the treasury fed accord of 1951 is when the Fed finally was kind of granted independence to be able to conduct monetary policy the way we would think of it today." – Carola Binder [06:24]

• Past Political Pressure: Presidents like Richard Nixon and Lyndon Johnson tried to influence Fed policy for political gain, illustrating why independence matters.

  • "Most famous would be Richard Nixon when he was pressuring Arthur Burns for looser monetary policy to try to help his re election chances." – Carola Binder [06:43]

4. The Global Trend Toward Independence

• During the 1990s, countries from Japan to the UK adopted independent central banks, following evidence that independence correlates with lower inflation.

  • "Countries with more independent central banks have lower levels of inflation... it's a pretty strong correlation that holds across time from the 70s to two years ago and across different kinds of governments." – Carolina Gariga [08:07]

• Consequences of Lost Independence: When politics intrudes, inflation surges (examples: Argentina, Turkey, Hungary).

  • "When an attack to central bank independence becomes public, you can see the effects in inflation going up." – Carolina Gariga [08:29]

5. Recent Erosion of Norms and Trump’s Pressure

• Presidential Criticism: President Trump, while initially appointing Jerome Powell as Fed Chair, publicly criticized and pressured for lower rates, breaking a long-standing norm.

  • "There had been a norm for many years that the president wouldn't... rant about the Federal Reserve. So that was a shift in kind of what was seen as acceptable for a president to do." – Carola Binder [09:20]

• Public Comments’ Significance: These actions revealed the risks if monetary policy was less insulated.

  • "If we had left monetary policy in the hands of the president, we would have had more inflation." – Carola Binder [09:41]

• Desire for Oversight: Especially after crises (e.g., 2008 financial crisis, COVID pandemic), some calls have emerged for more Fed accountability as its role has expanded.

  • "You can see why there is kind of more calls for more oversight of the Fed... if it's seen as maybe going beyond what its original intentions were." – Carola Binder [10:45]

6. Pandemic Era: Expansion of the Fed’s Power

• Crisis Response: The Fed’s aggressive interventions in 2020 (corporate bond-buying, municipal lending) went beyond prior precedents.

  • "That’s kind of a mic drop when it comes to the world of central banking, because he’s basically saying...we have this ability to... print money out of thin air, and we can use that to really safeguard every important market." – Gina Smilek on Powell's "no limit" quote [11:58]

• Blurred Lines: Actions like lending to municipalities, buying junk bonds, and the public presence of Fed leaders (Powell on the Today Show) demonstrated new, more visible roles.

  • "I think they were trying to reassure the country that they were really bringing out the big guns." – Gina Smilek [15:38]

• Reluctant Expansion: Powell resisted some expansions, repeatedly affirming that “this is something for Congress to do”—emphasizing appropriate constitutional roles.

  • "I don't think we want that authority. I think that's something for Congress to do." – Jerome Powell [13:22]

7. New Presidential Moves to Exert Control

• Trump’s Executive Order (Feb 2025): Targeted tighter White House control over regulatory agencies, including the Fed, but exempted its monetary policy decisions.

  • "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." – Catherine Judge [21:09]

• Potential for Indirect Erosion: Even partitioned, increased oversight over some functions could undermine overall Fed independence.

  • "The core challenge is you have these individuals who are playing multiple roles, and how credible is it that they are going to maintain independence on one front and not others?" – Carola Binder [22:11]

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Notable Quotes & Memorable Moments

• On Political Pressures:
  "As much as politicians might want to control interest rates, they can't. And that's thanks to an accord between the treasury and the Federal Reserve in 1951..." – Darian Woods [05:53]

• On Fed’s Unprecedented Power:
  "There's no limit. And I think that's kind of a mic drop...we have this ability to... print money out of thin air..." – Gina Smilek [11:58]

• On Powell’s Bluntness and Personal Philosophy:
  "Chair Powell will often say things like, this is a matter for Congress to decide." – Gina Smilek [12:39]
  "What we're going to do at the Fed is keep our heads down and keep working..." – Jerome Powell [22:36]

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Timestamps for Important Segments

• What Is the Fed & Why Independence Matters: [04:20 - 07:33]
• Global Central Bank Independence Trends: [07:33 - 08:48]
• Presidential Pressure & Changing Norms: [08:48 - 10:45]
• Pandemic Crisis & Federal Reserve Powers: [10:58 - 17:46]
• Executive Order, Risks of Political Meddling: [20:04 - 23:33]

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Conclusion

The episode persuasively shows how and why the Federal Reserve was designed—with global precedent—to be independent from direct political control, noting how recent executive maneuvering and public criticism could weaken this firewall with profound consequences for the economy. Through a blend of history, contemporary context, and expert voices, listeners gain a clear sense of the stakes: independent monetary policy isn’t just technical detail, but a key pillar of economic stability.

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For Further Listening

• Explore the history of the 1951 Treasury-Fed Accord
• Follow Gina Smilek’s work on contemporary Fed challenges
• Learn more about global central bank structures

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Listen to Throughline for more rich, historical context behind today’s news.

Transcript

[NPR Announcer]

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[Planet Money Host]

Hey everyone rund here. Since January, President Trump has pressured the Federal Reserve to lower interest rates. But so far the numbers haven't moved.

[Darian Woods]

And.

[Planet Money Host]

And that's by design. The Federal Reserve is supposed to be an independent government agency, meaning that the Fed makes decisions about monetary policy without Congress or the White House interfering. But that doesn't mean the Federal Reserve is completely free from influence. Earlier this month, President Trump announced his list of potential candidates to succeed current chair Jerome Powell, whose senior is up in May next year. Year. Some people are concerned that Trump's pick could compromise the central bank's independence. Today on the show, we're bringing you a short history of the Federal Reserve, why its independence is so important and what President Trump has tried to do to influence it. It's from our friends over at the Indicator from Planet Money.

[Darian Woods]

Enjoy. President Donald Trump has gone from threatening to oust Jerome Powell, the chair of the Federal Reserve, to saying he has no intention of firing him.

[Wayland Wong]

And this is not the first time Trump has raised this possibility of interfering with the Fed or even firing Powell. Trump has been loudly critical of Powell for years now, and since January, the president has accused him of playing politics by keeping interest rates high.

[Darian Woods]

And though so far Trump hasn't taken any action to dump Powell, every time Trump's anger at the Fed chair flares, markets quiver and economists start flipping out because they say the Fed has to be independent. It has to focus on keeping the economy healthy. And that process must be free from politics and pressure. It needs to just focus on what's right for the economy. But why exactly? Hello and welcome to Planet Money. I'm Darian Woods.

[Wayland Wong]

And I'm Wayland Wong. Why is the independence of the Federal Reserve so sacred? Why does just the idea of Trump interfering with the Fed send economists into a tizzy?

[Darian Woods]

Today on the show, a primer on the Fed. From the Indicator podcast, We have three ways of looking at that question for you. Today we'll look at what the Fed does, why its independence is so important, and one quieter step. President Trump has taken to influence the Fed this year.

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[Darian Woods]

The Federal Reserve the US central bank has two big keeping prices stable and jobs plentiful. The Fed can do things like change interest rates to address inflation. Raising interest rates can bring down prices, but could also make new mortgages more expensive. And it can put people temporarily out of work, economist Carola Binder of the University of Texas told us. These can be unpopular moves for a politician.

[Economist (Carola Binder)]

If their goal is to get elected in a few months or even in a few years, they're not going to worry about the long run consequences of their policy actions. So lower interest rates. Maybe they boost the economy right now, but in the longer run maybe lead to inflation.

[Wayland Wong]

The Fed has more credibility. Investors and the public generally believe it'll try to do what it takes, and that's important in getting the job done.

[Darian Woods]

And when we say the Fed is independent, we don't mean it's completely separated from democracy. While a president can't say lower interest rates when they feel like they're getting too high, the Fed is accountable to the public in other ways, right?

[Wayland Wong]

The president appoints the members of the Federal Reserve Board. The Federal Reserve's goals low inflation and high jobs are set by Congress, and the agency is accountable to Congress.

[Darian Woods]

Last summer, Republican Senator John Kennedy grilled Fed Chair Jerome Powell.

[Gina Smilek]

I got two seconds.

[Jerome Powell]

So when are you going to lower interest rates? I'm today not going to be sending any signals about the timing of any future actions.

[Darian Woods]

As much as politicians might want to control interest rates, they can't. And that's thanks to an accord between the treasury and the Federal Reserve in 1951. In the US inflation was running high after World War II and during the Korean War. But the Fed had a problem. It was effectively controlled by the Treasury Department which was led by the President's Treasury Secretary. And that got in the way of the Fed doing its main job, influencing the money supply, keeping inflation down, AKA monetary policy.

[Economist (Carola Binder)]

So what's called the treasury fed accord of 1951 is when the Fed finally was kind of granted independence to be able to conduct monetary policy the way we would think of it today.

[Wayland Wong]

That didn't mean that presidents didn't try to influence the Fed. Like think of Arthur Burns, Fed chair in the 1970s.

[Economist (Carola Binder)]

Most famous would be Richard Nixon when he was pressuring Arthur Burns for looser monetary policy to try to help his re election chances.

[Darian Woods]

Lyndon Johnson also twisted the screws on his Fed chair at the time. And through the 1970s and 80s, a consensus started to emerge among economists. The job of central banks to bring down inflation was a lot easier without politicians getting in the way, trying to pressure the lever down. And in return for more autonomy, central banks could be more transparent about their decision making.

[Economist (Carola Binder)]

As economists came to recognize the benefits of transparency and of independence, it kind of became more accepted and more part of the culture at the Fed and even the culture at central banks around the world.

[Wayland Wong]

The bank of Japan, the bank of Mexico and the bank of England became independent in the 1990s. The European Central bank was built as independent from day one. And the evidence suggests that independence works to control inflation.

[Darian Woods]

Carolina Gariga is a political science professor at the University of Essex in the UK. Carolina and her co authors research finds that countries with more independent central banks have lower levels of inflation. But like all good social scientists, she's quick to note that correlation doesn't always equal causation.

[Carolina Gariga]

It's not causation, but it's a pretty strong correlation that holds across time from the 70s to two years ago and across different kinds of governments.

[Darian Woods]

A very strong correlation that is definitely pointing in a direction and winking.

[Carolina Gariga]

Exactly.

[Wayland Wong]

Carolina also talks about countries that have eroded their central bank independence.

[Carolina Gariga]

You can see central bankers being fired and then inflation spiking. I mean I'm from Argentina and I can give you many examples. And this has happened not only in Argentina, has happened in Turkey, has happened in Hungary. When an attack to central bank independence becomes public, you can see the effects in inflation going up.

[Darian Woods]

Carola Binder at UT Austin says in the US the consensus grew that central bank independence was a good thing. And this led to A norm. Presidents were letting the central banks do their thing until the 2016 election, when Trump started publicly and loudly criticizing the Federal Reserve. That continued into his presidency. He appointed Fed Chair Jerome Powell, but started making these public swipes against him from 2018. This was a. A major shift in the president's relationship with the Fed.

[Economist (Carola Binder)]

There had been a norm for many years that the president wouldn't, well, I don't know which presidents had Twitter, but they wouldn't go on Twitter or something like that ranting about the Federal Reserve. So that was a shift in kind of what was seen as acceptable for a president to do.

[Darian Woods]

Carolla says these comments are revealing.

[Economist (Carola Binder)]

You frequently have presidents who disagree with what the Federal Reserve does. They almost always disagree on the side of, we should have looser policy, we should have lower interest rates. So it shows you, well, if we had left monetary policy in the hands of the president, we would have had more inflation.

[Wayland Wong]

That said, Kerala says the public does want accountability, like, how did we even get such high inflation? What went wrong? How can we avoid that happening again?

[Economist (Carola Binder)]

The Fed should give them that kind of accountability, should be transparent about the mistakes they made and what they've learned and what they might change.

[Darian Woods]

Carola does think there is a grain of truth there in the frustrations that might lead someone wanting a politician to strong arm the economists. Think about what we've been through, the high inflation, the pandemic, and then the global financial crisis before that, the Fed was scrambling to help, of course, and that meant expanding its role and taking on unconventional new action like buying up tons of mortgage securities and bonds.

[Economist (Carola Binder)]

You can see why there is kind of more calls for more oversight of the Fed or calls to kind of constrain it if it's seen as maybe going beyond what its original intentions were.

[Darian Woods]

That raises the question, how did the Fed become so powerful? Here with me now is Gina Smilek, reporter for the New York Times, who wrote a book called Limitless. The Federal Reserve Takes on a New Age of Crisis. And. And the key thesis of this book is that for better or for worse, the Fed has amassed a huge amount of power over the economy.

[Gina Smilek]

That is correct.

[Darian Woods]

And there's this key moment at the peak of the early pandemic chaos where this becomes really clear, right?

[Gina Smilek]

This is the morning that the Fed rolls out a bunch of details on several market rescue programs that it is setting up that it has never set up before. And then Jerome Powell goes on a webcast with the Brookings Institution, and the host of it says, you know, what are the Limitations here. You know, what are you capable of? And Chair Powell replies, but there really.

[Jerome Powell]

There'S no limit on how much of that we can do, other than that it must meet the tests under, under.

[Darian Woods]

Under the law, as there is no limit.

[Gina Smilek]

There's no limit. And I think that's kind of a mic drop when it comes to the world of central banking, because he's basically saying that here at the Fed we have this ability to sort of at least temporarily print money out of thin air, and we can use that to really safeguard every important market.

[Darian Woods]

A microphone moment, indeed. All right, so let's start with why the Federal Reserve tries to be politically independent.

[Gina Smilek]

So if you had a Federal Reserve that was super linked up with politicians who are worried about reelection, they might really not focus on the inflation side of their mandate.

[Darian Woods]

And did you come across any stories that reveal how Fed Chair Jerome Powell personally considers his role?

[Gina Smilek]

Yeah. So Chair Powell will often say things like, this is a matter for Congress to decide. This is a matter for politicians to decide. Side. A great example of how Chair Powell was really trying to keep the Fed limited and within its length. You know, there had been some appetite on the Hill to see the Fed get into municipal lending leading up to the pandemic. You know, we saw some Democrats saying back when the financial crisis hit, banks got bailed out, but, you know, Detroit didn't get bailed out. And how is that fair?

[NPR Announcer]

Why isn't it equally important to ensure that state and local governments have access to credit?

[Jerome Powell]

You know, we don't have authority, I don't believe, to lend to state and local governments. I think we try.

[NPR Announcer]

That could be a tool.

[Jerome Powell]

I don't think we want that authority. I think we want. I think that's something for Congress to do. I think so.

[Darian Woods]

So these ideals of the Fed and these ideals of Jerome Powell are all very well in what we call peacetime. But let's think back to the early days of the pandemic, early 2020, I.

[Gina Smilek]

Think it's easy to forget now, but at the same time that we were all trying to figure out how to do work from home and how to adjust to maybe some job losses in our families and those kinds of challenges. The markets were trying to adjust to a world where we didn't know if people would ever come back to offices, and we didn't know which government debt was going to be safe. And what this resulted in was just a run for the exits. People wanted cash. They thought cash was the only thing that was safe, and they were selling everything else. And so we saw huge breakdowns across a whole range of markets that usually are very safe. And this is the kind of thing that's going to hit not just Wall street, but almost certainly Main street if it continues.

[Darian Woods]

Yeah, but as Jerome Powell has a habit of saying, there are no atheists in a foxhole. You know, sometimes you change your mind in a crisis.

[Gina Smilek]

Yeah. And I think sometimes you change your mind when not changing your mind is going to cause the worst problem.

[Darian Woods]

And when we're talking about the Fed pushing past its previous boundaries, it seems to me there are two key dates with two key sets of policies that forever changed what the Fed was capable of. So tell me about that first Fed bundle of programmes in late March of 2020.

[Gina Smilek]

So we get to March 23, 2020, and we see the Fed jump into a bunch of markets that it hasn't previously touched. It rolled out a corporate bond buying program and a program that was sort of promising to help out Main street companies.

[Darian Woods]

So not just the big multinational companies, but I guess aimed at mid sized or even small businesses.

[Gina Smilek]

Yeah. And I describe this in my book, as somebody described it to me, which is it was really about covering the waterfront. They wanted to make sure that they were trying to service sort of every place that you might see borrowing and lending break down in the economy.

[Darian Woods]

Jerome Powell appears on TV pretty soon after.

[NPR Announcer]

And joining us now in a rare and exclusive live interview is Jerome Powell.

[Darian Woods]

He's on the Today show to explain this package. Is that unusual for a Fed chair?

[Gina Smilek]

It's pretty unusual. You know, the Fed chairs tend to stick to the more sort of business oriented publications and TV shows. I think they were trying to reassure the country that they were really bringing out the big guns.

[NPR Announcer]

So you're saying no, it's not a.

[Economist (Carola Binder)]

Blank check, but yes, you're prepared to.

[NPR Announcer]

Spend an unprecedented amount?

[Jerome Powell]

We certainly are.

[Darian Woods]

And then it seems like that had an effect. It calmed the markets. But even that huge response didn't totally resolve all the jitters. So let's go through the second big fire hose in early April 2020.

[Gina Smilek]

So April 9, 2020 rolls around and the Fed rolls out a big new package that includes a municipal lending program and it also adds in junk bonds to the Fed' bond purchase program. And those are two pretty uncomfortable things for the Fed to do. The Fed has openly said that it doesn't want to be involved in the municipal bond market. And you know, the junk bond market is also pretty unattractive because it's this big market of people who took on in some cases, a pretty significant amount of risk. And no central bank wants to feel like they're bailing out the junk bond market. But the concern is, you know, these are big companies. If you leave this market completely closed, you know, if it fails to operate the way it should, if it becomes impossible for people to issue debt at rates that they can afford to manage to stay in business, you could have a huge round of layoffs just because this market is flailing.

[Darian Woods]

And so that day, Jerome Powell crosses another one of his kind of personal lines. He seems like he's kind of recommending things for the politicians to do.

[Jerome Powell]

In many cases, what people really need is direct fiscal support rather than a loan. And what we can do is loans. So there's a big need for fiscal policy.

[Darian Woods]

Say. Tell me about that.

[Economist (Carola Binder)]

Yeah.

[Gina Smilek]

So what he's saying basically here is, dear Congress, we're trying to help people, but people need money to keep their businesses open or money to make up for the fact that they're not going to work, et cetera. And we've just had the CARES act pass. But the CARES act was always meant to be pretty short term. And this is Jerome Powell being clear that, like the Fed cannot solve every problem here, Congress needs to act.

[Darian Woods]

The Fed does in general, try to stay in its lane or at least operate under the powers given to it by the Federal Reserve Act. But it is enormously powerful and has been lending to all kinds of areas of the economy. And in doing so, it was kind of picking winners and losers. That is not apolitical. So now it finds itself firmly in political crosshairs. Gina Smyrlick, thank you so much for talking to the Indicator.

[Gina Smilek]

Thank you for having me.

[Darian Woods]

After the break, an executive order that lays the groundwork for more presidential control.

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[Darian Woods]

So ideally, the Fed's decisions on interest rates should be independent. That's where we started when Trump was inaugurated in January, but since then a lot has happened. President Trump has signed more executive orders than any president this early in the term. 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 this one executive order as it relates to the Federal Reserve.

[Wayland 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.

[Gina Smilek]

There is an effort to signal, look.

[Economist (Carola Binder)]

We don't want to mess with monetary policy. So it seeks to provide a little bit of calm and status quo maintenance.

[Wayland Wong]

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

[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.

[Wayland 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.

[Economist (Carola Binder)]

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

[Wayland Wong]

Fed Chair Jerome Powell has been fielding more questions lately over whether his decisions on interest rates will be influenced by Trump.

[Darian Woods]

Here's what Powell told a House committee in February about potential executive branch interference.

[Jerome Powell]

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 try 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.

[Wayland 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 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.

[Wayland 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 unless he.

[Darian Woods]

Decides to take unprecedented and possibly illegal action sooner. The original episodes from the Indicator were produced by Corey Bridges, Brittany Cronin and Julia Ritchie. They were engineered by Sina Lofredo, James Willits and Gilly Moon. They were fact checked by Sarah Juarez. Kate Concannon is the editor of the Indicator. Follow us wherever you get your podcasts.

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