The Fed under attack
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What unprecedented actions is the Department of Justice taking against the Federal Reserve?
What a long, strange trip it has been. From American Public Media, this is MarketPlex.
In Los Angeles, I'm Kyle Rizdahl. It is Monday today. This one is the 12th of January. Good as always to have you along, everybody. Jay Powell is, first of all, the chairman of the Federal Reserve. We all know that. He is also, though, a lawyer by training, a private equity guy by background, and, and I promise this will make sense in a minute, a fan of the Grateful Dead, a deadhead, if you will. So as we mark the passing this past weekend of the band's guitarist, Bob Weir, One of his lyrics comes to mind, and this is where Powell and the dead come together in this moment. What a long, strange trip it's been, that lyric goes from the 1970 classic Truckin'. What a long, strange trip indeed. The first time I interviewed Jay Powell was the summer of 2018, not long after he'd gotten the job.
His first broadcast interview, if I might humble brag just a bit. And I asked him about something that was even then strange. Becoming clear and apparent, the guy who put him in the job, criticizing him personally and often. Here's what Powell said.
Let me just say I'm not concerned about it. And I'll tell you why. We have a long tradition here of conducting policy in a particular way. And that way is. independent of all political concerns. We do our work in a strictly nonpolitical way based on detailed analysis, which we put on the record transparently, and we don't consider political considerations. We don't take political considerations into account. I would add, though, that no one in the administration has said anything to me that really gives me concern on this front. But this is deep in our DNA for a long, long time.
How does Jay Powell's background influence his role as Fed Chair?
The Fed has felt it important to conduct our business that way. I'm deeply committed to that approach, and so are all of my colleagues here.
And here we are, just shy of eight years later, and this was part of what Powell said yesterday afternoon after being subpoenaed by the Department of Justice and threatened with a criminal investigation.
This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure or intimidation.
I think I don't need to say this, but I will just to be clear. This is a very big deal. You know how we got here. We've covered that a lot. The question is, what happens now? That's in a minute, but I'll tell you what. To look at the markets today, yesterday was just another Sunday. We'll have the details when we do the numbers.
About a year and a half ago, right before the presidential election, with an eye toward what had happened in the first Trump term that I just alluded to, we spent the whole program on Fed independence and what might happen if it goes away. Given the events of the past 24 hours, we're going to revisit some of the conversations we had for that show on this show, including one with Wendy Edelberg. She's a senior fellow at the Brookings Institution. Also, not for nothing, a former Fed staff economist. Wendy, it's good to talk to you again.
Good to be here.
We keep meeting.
Talking about the same issue again.
Well, that's right. Again and again and again. Look, first of all, I want your gut. You got this news yesterday. You saw it. What did you think?
Oh, I agree with you. It's a very big deal. And I am mystified why the bond market didn't react. And frankly, Trump is probably frustrated that the bond market didn't react if he's paying attention. Short term treasury rates didn't budge today. Markets don't think what Trump did ensures more rate cuts this year. And that surprises me.
Yeah, we'll keep going. How come?
Well, so for example, futures markets imply an expectation of only 40 basis points of cuts in the Fed funds rate under the next chair's term. So Trump's hand-chosen guy oversees not even two full cuts. The chance for a full percentage points of cuts – Less than 10 percent. So whatever Trump is selling with these attacks on the Fed, the market isn't buying it yet.
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Chapters
5 chapters
1
What unprecedented actions is the Department of Justice taking against the Federal Reserve?
0:02–2:04
2
How does Jay Powell's background influence his role as Fed Chair?
2:04–11:04
3
What implications does the DOJ investigation have for the Federal Reserve's independence?
11:04–16:49
4
How do market reactions reflect the Fed's credibility concerns?
16:49–18:12
5
What does the future hold for the Federal Reserve's independence?
18:12–26:15