A primer on the Federal Reserve's independence
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Why has President Trump criticized Jerome Powell?
This is Planet Money from NPR. Over the past week, 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.
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.
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.
What is the importance of the Federal Reserve's independence?
And I'm Weyland 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?
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. The Federal Reserve, the US central bank, has two big goals, keeping prices stable and jobs plentiful.
How does the Federal Reserve influence the economy?
The Fed can do things like change interest rates to address inflation. Raising interest rates can bring down prices. But it could also make new mortgages more expensive. And it can put people temporarily out of work. Economist Carol Abinder of the University of Texas told us these can be unpopular moves for a politician.
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.
The Fed has more credibility. Investors and the public generally believe it will try to do what it takes, and that's important in getting the job done.
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. 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.
Last summer, Republican Senator John Kennedy grilled Fed Chair Jerome Powell. I got two seconds. 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.
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, a.k.a. 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.
That didn't mean that presidents didn't try to influence the Fed. Like think of Arthur Burns, Fed chair in the 1970s.
Most famous would be Richard Nixon when he was pressuring Arthur Burns for looser monetary policy to try to help his re-election chances.
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.
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Chapters
8 chapters
1
Why has President Trump criticized Jerome Powell?
0:01–1:04
2
What is the importance of the Federal Reserve's independence?
1:04–1:46
3
How does the Federal Reserve influence the economy?
1:46–4:35
4
What historical events led to the Fed's independence?
4:35–8:16
5
How has Trump attempted to influence the Federal Reserve?
8:16–8:39
6
What is the relationship between central bank independence and inflation?
8:39–10:37
7
What powers does the Federal Reserve have in times of crisis?
10:37–11:15
8
How does Jerome Powell view the Fed's role in politics?
11:15–19:45