This is an audio transcript of the Unhedged podcast episode: ‘Can the Fed stay independent?’
Katie Martin
The new US administration is busy. It’s rewriting the rules on global trade. It’s rethinking checks and balances. It’s dismantling a post-second world war transatlantic order before our very eyes. One thing it’s left alone is the central bank, the Federal Reserve. So markets are OK, right? Well, today on the show, we’re asking, oh, for heaven’s sake, what now?
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This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist at FT towers in lovely, sunny springtime London and I’m joined by central banking brainbox Chris Giles, who recently wrote about how to kill the Fed’s independence. Chris, stop giving them ideas.
Chris Giles
Sorry. Sorry, Katie. It was not a how-to guide, (laughter) but it did seem as if it might be.
Katie Martin
So look, first up, Jay Powell, chair of the Federal Reserve, chair of the US central bank — every time he opens his mouth right now, which he does through very gritted teeth, he says something to the effect of no, I cannot be fired; no, I cannot be removed from my position.
Chris Giles
Well, he says that and that would have been the correct view as of the election date. In fact, as of today, that is where the law stands.
Katie Martin
He’s due to be there until what, early ‘26, right?
Chris Giles
He’s due to be chair until early ‘26. He can stay, you know, 2028. And normally a chair, when they finish their term and he knows that he’s not gonna be reappointed, would then stand down. But we’ve seen pretty recently that Michael Barr, who was the vice chair for supervision, stood down from that position because he knew that he wasn’t in line with the new administration’s thinking, but didn’t stand down from the board.
Katie Martin
Right.
Chris Giles
Meaning that Donald Trump can’t put one of his own people on to the seven-person Federal Reserve Board.
Katie Martin
There is this simmering tension, isn’t there, between the Fed and the White House where, you know, Trump is very keen to say that he likes interest rates to be lower. He’s a low interest rate kind of guy. The Fed, meanwhile, is . . . It’s not a political animal and it’s watching with great interest how inflation has picked up again recently. It’s quite sticky. It won’t want to cut interest rates into that environment. So you have got this tension there. The mere fact that Jay Powell is having to say out loud, no, I can’t be fired, tells you that we’re living in pretty extraordinary . . . I’ve never seen anything like that.
Chris Giles
No. We just . . . It just would never have occurred.
Katie Martin
No. Never ever. So now you’ve got this tension, as you say, that Barr made this quite unusual move, but theoretically, not that we are giving anyone ideas here, but if the president did want to change personnel, shall we say, within the Federal Reserve, how would you suggest that he could go about that?
Chris Giles
So theoretically again, it’s actually easier than you think. And it will come down, we know, to the Supreme Court because it’s already in progress — this is the important thing — not at the Fed, but at the National Labor Relations Board.
Katie Martin
OK. What’s that got to do with the central bank?
Chris Giles
Well, because both of these boards have what’s known as a multi-member board. So they have more than one person who governs them and takes decisions. And Donald Trump, very early in his presidency, fired a woman called Gwynne Wilcox, who happens to be a black woman from the board of the National Labor Relations Board. And she’s suing.
Katie Martin
Right.
Chris Giles
Because he fired her for no cause at all. Just, I don’t like you; get out. In her contract — and she was given the contract by Congress, just like the Fed — it says that you have to have cause. You have to have caused some gross misconduct in office to be fired by the president.
So he’s fired her. She’s suing. We’ve now seen it a couple of days ago that the attorney-general of California and other people are coming in on her side. This is going to the Supreme Court. There is no doubt about it. This is going to the Supreme Court. It’s a massive test case. It’s quite likely she will lose.
I hate to say this, it’s quite likely she will lose because the Supreme Court has been going in a direction already of saying, actually, Congress, it’s unconstitutional for Congress to give these sorts of powers to these sorts of boards. It’s already said this for the Consumer Financial Protection Bureau. And the only reason this is different is that it was one person in charge, and this is a multi-member board.
If they change the rules for the National Labor Relations Board, that means anyone on the Fed can be fired at the president’s whim, and that’s quite likely to happen.
Katie Martin
Cool, cool, cool, cool, cool. So that encompasses everyone who’s on the Fed board, right? But it’s a bit of a strange beast, isn’t it, the Fed. You’ve got the regional presidents and you’ve got the federal. How does this all work?
Chris Giles
Yeah, so when we think about interest rates, which all the time we are, it’s not the Fed board that takes the decision. In fact really it’s just . . . It’s really just dumb. Jay Powell, actually. And he rigs around him and makes him . . . his mind up and everyone votes with him except for maybe one person they race against. But there are five voting regional Fed presidents, and they’re not appointed by the president of the United States at all. They’re appointed in their regions of the Fed.
Katie Martin
Right.
Chris Giles
But that isn’t actually that much of a protection here for monetary policy because there are some quite big constitutional questions about whether their position, voting on something as important as interest rates, is constitutional. And this isn’t just, you know, mad conservatives who are trying to push the constitution in one direction is saying this. It’s been quite well known for quite a long time, that this might fall foul of the constitution if someone wanted to bring it.
And so far, the Supreme Court hasn’t ever accepted cases. They said the people trying to bring it haven’t got any standing in this issue, but that could easily change. And the only way they are constitutional is by being what’s known as inferior officers of the United States. So they’re not very important. But how can you have not very important people taking some of the most important decisions in the US economy? And that is the problem that they face.
Katie Martin
So is the issue here that there’ve always been these potential cracks, but that no one’s ever sought to exploit them before, and it’s only this new administration that’s doing that?
Chris Giles
Yeah, absolutely. And this is happening across the administration. So it is the unitary executive theory in action. It is that only the . . . So the executive part of the government takes decisions which are not taken by law, by Congress passing laws. And the unitary executive theory, which Trump and his acolytes are in favour of, suggests that unitary or that executive power lies solely in the president, solely in the president. And they are gonna test this.
Supreme court has obviously, in the past, not accepted. The precedents go back a very, very long way, 90, 100 years or so, but it is gonna be tested. These things are gonna go to the Supreme Court. We will find out and we have to place our faith in those justices, most of whom or many of whom were appointed by Trump himself.
Katie Martin
This sounds a little alarming. So what is the timescale on which we need to worry about all this?
Chris Giles
Well, certainly on the timescale on the Gwynne Wilcox and the national relation that’s happening now. That’s in the lower courts at the moment. That will happen probably this year.
The Supreme Court is absolutely guaranteed to take it because it is a very important constitutional question. And it is one where if the Supreme Court said, no, we can’t be bothered with this one, would be that really, really weird indeed. So that is absolutely going and people are lining up on either side of this case.
So the issue then is whether the Supreme Court gives a very narrow ruling, which applies only to the National Labour Relations Board, or something that applies more broadly that we don’t know. And the Supreme Court sometimes does give very, very narrow rulings. And then you’d have to have a test case where Trump would have to fire someone in the Fed itself.
So again, so it’s not absolutely for certain that he will have this power by the end of the year, but you know, it is something to watch and watch closely.
Katie Martin
You’ve been following the Fed for longer than you care to remember?
Chris Giles
Too long.
Katie Martin
Yeah. (Laughter) You know how grave of a threat to its independence in policymaking do you judge this to be? And when you talk to academics or current or former policymakers about this situation, what do they say?
Chris Giles
Well, they say two things. One is if the Supreme Court takes these decisions, it puts the Fed right in the line of fire. There is, you know, there is not an easy escape from this. And the second thing is that some of this is already happening.
So there was an executive order about two weeks ago from signed by Donald Trump, which said that any agencies of government which have been given powers by Congress, ie the Fed, have to have everything passed by the Office of Management and Budget and have to do whatever the president says. And it applied specifically to the fed in terms of their regulatory policy. But where is the boundary between monetary policy and regulatory policy? Monetary policy was given a carve out.
Again, if this executive order gets approved by the Supreme Court, then the carve out for monetary policy applies only on the president’s whim. So what he gave away in a carve out, he could therefore take back. And this is again a second and separate threat to the Fed. So one is about people. One is about does Congress have the authority to delegate powers?
Katie Martin
Right.
Chris Giles And both are gonna get tested. The second one will take a little bit longer.
Katie Martin
When you put this piece out, it was about a week ago. You know, suddenly everyone I knew was reading it. What kind of reaction did you get? Did you get people calling up saying, Chris, you’re an idiot? What are you talking about?
Chris Giles
Well, I was worried about that because clearly the constitutional law surrounding the Fed is quite complicated.
Katie Martin
Yeah, it’s nerdy stuff.
Chris Giles
Nerdy stuff. And I was very worried about it, but no, I didn’t get anyone saying, you got it wrong. I had a Harvard Law School academic saying, you’ve got it basically spot on, and he’d help me a bit. Yeah, he was nice. He you’d help me with some of the points of law. And he said he’d had a dozen interview requests since the piece went out.
Katie Martin
Oh, interesting.
Chris Giles
So there was a lot of interest and concern because it’s all about how one part of what this administration does then can affect other things. And even though the Fed might not seem to be in the line of fire now, if these other things happen, then it’s got no protections left.
Katie Martin
One of the interesting things here is that, you know, at the point of the election and Trump won fair and square, there was this idea that, well, obviously he wouldn’t do anything to monkey about with the Fed because that would potentially be very harmful to US markets, whether that’s bond markets or stock markets. It could be very destabilising for the dollar. So obviously he would never kind of grab this third rail. But since he’s coming to office, I think it’s safe to say that they’ve broken with Europe.
Chris Giles
There are lots of things we have thought are obviously not going to happen. That have already happened.
Katie Martin
You know the tariffs 25 per cent with Canada and Mexico. I mean who’d have thunk it.
And one of the interesting things in the markets today is that normally when bad stuff happens the dollar jumps because it’s got this like safe haven status. It’s got this haven quality. Bad stuff happens. Investors get nervous, they buy dollars, they buy us government bonds because they’re the safest assets on the planet. That’s not so much happening today.
And what I’m picking up is more people willing to say out loud, you know, the dollar’s safe haven status might not be as secure as we previously thought. I genuinely never thought I would see the day. So there’s a lot of, let’s say, spicy and unorthodox ideas out there. In your experience, how has this worked out for other countries that have done zany stuff like this?
Chris Giles
I mean, let’s just pick on one. Let’s pick on Turkey, which had a very similar populist president who thought he understood economics better than his finance ministers, of which legions of them were fired, and central bank governors of again, many, many were fired. And he put in his own people. And he had this rather unusual idea that lower interest rates brought lower inflation.
Katie Martin
Unorthodox, we call it Chris.
Chris Giles
Not that dissimilar from President Trump. Anyway, Turkey this week celebrated really, really good inflation figures. They’ve just fallen below 40 per cent. And that means that the central bank is thinking it can reduce interest rates from the current level of 45 per cent. It didn’t go very well.
Katie Martin
No, I mean, Turkey went really wrong. I still can’t imagine the US going as wrong as Turkey, but its bonds got absolutely taken to the woodshed. Currency got annihilated, had a full blown crisis.
You had, you know, various efforts to replace central bank governors until we finally stuck on someone that the market kind of liked and trusted. If you really mess things up, then you can end up in the situation that Turkey was in a few years ago. And that’s not a happy space to be.
Chris Giles
Yeah, and we wouldn’t expect that for the US because we wouldn’t expect its currency to crater like Turkey’s. And then, and because it’s also a bigger economy and it’s less exposed to the world, we wouldn’t expect so much imported inflation.
That said, you would expect dumb monetary policy to create inflation and be bad news. So, you know, you can look at the Turkish numbers and say, well, that’s not gonna happen. But you can, I think also look at the Turkish numbers and say, hmm maybe orthodox economics has a point.
Katie Martin
Maybe they’re not completely wrong. Another thing to quickly catch you on while you’re here is that again, thinking of wacky economic policy ideas. People close to Trump. So you look at Howard Lutnick, who’s the Commerce secretary is talking about, and I think Musk. Elon Musk is saying the same thing. Hey, maybe we need to rethink the way we calculate GDP, like the size of the economy. Maybe we need to strip the federal spending cuts out of GDP figures. For people who’ve been lucky enough to miss this, what are the people close to Trump saying about how you measure the size of the economy? And why are they saying it?
Chris Giles
Well, what they’re saying is that, look, we’re here cutting public spending. We’re getting rid of fraud and waste in government. And this is gonna make the GDP figures look bad because government spending is included in the GDP figures. And so let’s not include it. And therefore we can have a better GDP measure which doesn’t get affected by cuts to government spending.
Katie Martin
And that’s all perfectly normal, right? Everyone does this.
Chris Giles
No it’s completely wacko. I wouldn’t say it’s dangerous, but it could absolutely mess up the whole of US statistics. It’s totally, totally absurd.
Katie Martin
You know, messing with the central bank, highly unorthodox policies, potentially interfering with data. This is not the sort of activity that you associate with the world’s dominant reserve currency, the world’s dominant reserve assets. It strikes me they’re really playing with fire here.
Chris Giles
Yeah. And the thing is that you can keep being the world’s dominant currency. You can be the safe haven up to the moment when you’re not. And you don’t get it back.
Katie Martin
No.
Chris Giles
You don’t get it back. So you can do all this and you can. You can take a huge number of risks, and everything will be fine. Everything will be fine, and it will blow at some point. What we don’t know is when and I don’t think we should think it soon because there’s a huge amount of resilience in the US economy. It’s an enormous place, but taking a risk with this stuff is pretty dumb.
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Katie Martin
We’re gonna be back in a sec with Long/Short.
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Alrighty, let’s raise the mood with Long/Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Chris, what you got?
Chris Giles
Well, I’m gonna go short the Atlanta Fed GDPNow model.
Katie Martin
Oh, now, that’s a very nerdy but good answer.
Chris Giles
Because it was showing for the first quarter US GDP sort of going along at a growth rate of 1.5 per cent. And this week it’s plummeted. It’s now showing a contraction in GDP for the US for the first quarter of 2.8 per cent.
Katie Martin
That’s big.
Chris Giles
It’s absolutely big. It’s also nonsense.
Katie Martin
Right.
Chris Giles
Because what’s going on there was the key thing that changed it was a massive surge of imports in January which came out at the end of last week. And that’s really just to to forestall tariffs so…
Katie Martin
Right.
Chris Giles
And so whereas imports would normally mean that GDP is not doing so well because instead of producing things at home we are importing things. These imports are just going to be taken as stocks, and stocks contribute to GDP.
And it’s one of those classic cases of the model was estimated on a whole bunch of data and will have done everything properly. You get something wacko happening and it’s made the model go crazy but no one stepped in and say, no, I’m not sure about this.
Katie Martin
Because this is normally a number that people look at as a pretty solid indication of where GDP is going.
Chris Giles
It’s a great model in normal times, not normal times, but that’s a good example of why things are so weird at the moment.
Katie Martin
Okay, that’s a good one. I am long vowels. Regular listeners will be aware. I have long been amused by an asset manager over here in the UK called Aberdeen, which for reasons best known to itself a few years ago, got rid of all the E’s out of its name and started spelling itself as Abrdn. And I think the polite way to put this is that everyone, literally everyone, took the piss out of this.
This was just the most ridiculous rebranding you’ve ever seen, to the point where the now former chief executive said this was a form of corporate bullying. Anyway, today they’ve fallen on their sword, put the E’s back in, never speak of it again.
Chris Giles
Bullies win.
Katie Martin
Sometimes. (Laughter)
Chris Giles
Actually not bullies. Sane people who like vowels.
Katie Martin
Sane people who like vowels finally win the day. If you’re listening to this and you’re thinking of rebranding your company, don’t take the vowels out, otherwise everyone will be mean to you. So I’m long vowels, put them back in. Listeners on that note, we will be back in your ears on Thursday. So listen up then with all your vowels.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer. I’m Katie Martin. Thanks for listening.
