Marketplace - The Fed under attack

Episode Date: January 12, 2026

The Department of Justice has opened an investigation into the Federal Reserve and Chair Jerome Powell, a move Powell has since called "an unprecedented action [that] should be seen in the broader context of the [Trump] administration's threats and ongoing pressure" to lower interest rates. We take a closer look at what’s happening from inside the Fed, and look at the implications for the economy as a whole. Every story has an economic angle. Want some in your inbox? Subscribe to our daily or weekly newsletter.Marketplace is more than a radio show. Check out our original reporting and financial literacy content at marketplace.org — and consider making an investment in our future.

What a long, strange trip it has been. From American Public Media. This is Marketplace. In Los Angeles, I'm Kyle Risdahl. 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'll promise this will make sense. in a minute, a fan of the Grateful Dead, a deadhead, if you will. So as we marked 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

view, if I might humble brag just a bit. And I asked him about something that was even then 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 non-political 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. The Fed has felt it important to conduct our business that way,

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. 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 event 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, well, 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 point of cuts, less than 10%. So whatever Trump is selling with these attacks on the Fed, the market isn't buying it yet. But when they do, I worry. It will not be pretty. Okay. So let's talk about the market for a minute, because when we talked to you, it was October-ish of 2024. We had a long conversation you and I did. And you said in almost this many words, look, if Trump goes and does something drastic with the Fed, the bond market's going to go crazy and those will be the guardrails. Are there no guardrails now? Well, I have two guesses why the markets haven't woken up to what's going on. So one, maybe markets assume that

Trump's pick will get religion once in the position and prioritize Fed independence. I mean, maybe in a world where an independent Fed just happens to do precisely what Trump wants. I think the idea of the next chair prioritizing independence is just wrong. I think Trump learned his lesson with Powell, and he's not going to end up with another chair who defies him, and he's no doubt extracting promises and somehow taking steps to make sure those promises stick with anybody who wants to be the next Fed chair. And then maybe markets assume that other FOMC members, other members of the vote on interest rates will discipline Trump's chair pick because you need seven votes to change rates.

But I think the actions over the weekend should tell any bond holder that Trump has made it clear he will use all of his power in the executive branch to put pressure on FOMC members. And he's got a whole bunch more tools in the toolbox that he has not yet used. It is worth a mention here that the chair is only one of the votes. there are 12 votes, right? Seven members of the Board of Governors and five members of regional Fed presidents who get the vote and the chair is only one, but it is first among equals. I want to talk to you, though, about Federal Reserve credibility and what happens if it gets lost. And we do seem to be sort of down that slippery slope. Here's what you said to us in October 24

about Federal Reserve credibility and independence. Here you go. I worry about this a lot because is credibility is easy to lose and really hard to get back. If the Fed doesn't have credibility that in the long term, they've got it, what's going to happen is that people are going to start to think financial markets, households, businesses, everybody, you and me, we're going to start to think that inflation is going to remain high. And we're going to start building that into our behavior today. The new person, Wendy, will be agreeable to what President Trump has to say.

scale of one to the House is on fire. How worried are you about Federal Reserve credibility and independence? Well, my baseline is that Trump wounds the Fed but doesn't break it. So maybe, you know, I'm at a five, which is really bad. But I think the world will be recognizable three years from now. I just think it will be worse. it will mean that inflation continues to creep higher, inflation expectations continue to go higher, and all of this loose monetary policy probably gives us higher long-term interest rates instead of lower long-term interest rates. And what that means is that the chair that follows after Trump's pick will have to have tighter monetary policy than otherwise to earn back that credibility. Right. But last question, you got 15 seconds, but it probably won't take you long.

Do you believe this is actually about the building, this criminal investigation that's being promised? Indeed, I do not. I think that this is a warning shot to anyone who might be in a position to set monetary policy over the next year. Wendy Edelberg at Brookings. Thanks, Wendy. Thank you. It's worth a mention here amid the news today about the independence of the Federal Reserve's monetary policy decisions, interest rates, and who gets to decide. It's worth the mention that stable prices in full employment, the dual mandate, as known, is not the Fed's only job. The Fed plays a key role in banking regulation. And as

Marketplace is Justin Ho reports, regulatory independence matters too. The Federal Reserve is one of three regulators, keeping an eye on the country's banking sector. Hillary Allen, a law professor at American University, says the Fed focuses on financial stability. Essentially that banks don't take too many risks and blow up our economy in the process. Alan says that includes setting capital requirements for banks, also running stress tests to ensure banks can handle a downturn. They go in and they examine banks. They look at what kinds of assets they're investing in. They look at how they're funding their investments. They look at how banks are managing their liquidity. The goal here is to ensure that the banking system is resilient, says Catherine Judge, a professor at Columbia Law School. So that way we have a financial system that's able to provide the credit and services.

that everybody needs today. But it will also be in a position to provide that credit and those services when things go wrong. Judge says regulations can impose costs on banks. That's why she says regulatory independence is important. But if the Federal Reserve were to lose that independence? You could imagine a future scenario where a president says, look, I'm going to try to remove a governor who is appointed by somebody from the other political party.

But I'm not doing it because I disagree on monetary policy. It's that this person is furthering a regulatory agenda with which I fundamentally disagree. Judge says there are several factors that have been eroding regulatory independence already. Hillary Allen at American University says the Federal Reserve has taken steps that align with the Trump administration to roll back regulations. We've seen a commitment to cut supervisory and regulatory staff at the Federal Reserve by 30%. We've seen capital requirements be reduced for the largest banks in particular. Alan says that the Fed were to lose its independence. She'd expect even more regulatory rollbacks.

I'm Justin Howe for Marketplace. Coming up. We don't make widgets. Our business is based on professional services. The trickle-down of monetary policy. But first, let's do the numbers. Dow Industrial is inched up 86 points today. Two-tenths percent closed at 49,000.

590. The NASDAQ added 62 points, a quarter percent, 23, 73. The S&P 500 gained 10 points, two-tenths percent, 69 and 77. Cognitive dissonance is the phrase you're looking for here. The market's disconnected from the news. We've been talking about that, by the way, the turbulence hitting the Fed. That, along with President Trump's call to limit credit card interest rates to 10 percent, has been shaken up the big banks, several of which report earnings this week. Today, J.P. Morgan Chase dipped 1.4 percent. City Group down three. percent. Capital One Financial tanked 6.4 percent. Goldman Sachs increased about 1.1 percent on the day. Bonds, as Wendy said, barely budged. Go figure this one out. Price down, yield on the 10-year T-note up,

but just a hair. 4.18 percent on the tenure you're listening to Marketplace. This is Marketplace. I'm Kai Rizzol. Alan Blinder was another one of the people that we talked to for that show on Central Bank Independence a little bit more than a year ago. He's a professor of economics at Princeton. Also, though, in the mid-1990s, he was the vice chair of the Federal Reserve Board of Governors. So we got him back on the phone today for the insider's perspective on the news of the weekend. Professor Blinder, good to talk to you, again, sir. Very glad to be here, Kai. You saw this news break yesterday. I want you to take us inside the room since you've been there. What do you think the reaction was at the Fed? Surely they expected something. Well, they've been expecting something

for a long time. I don't think they expected this. I mean, this is a serious. serious attack on the Federal Reserve in general. I want to emphasize that. And of course, Powell in particular. They've probably been expecting some because Trump has been on a tirade against Powell and the Fed for quite a long time, as you know. Yeah, virtually since he was appointed. You've known Jay Powell for a long time, I imagine.

Yes. And I guess I wonder, you know, and I've interviewed him a couple of times. And he's always been completely measured and not going there. at all, if you take my meaning, when you ask him about politics and the president. What do you suppose pushed him over the edge to make this extraordinary video? Well, I think there's a threat of legal action. I heard the word criminal mentioned. I'm not sure what that could possibly mean, but it doesn't much matter to Trump and his DOJ.

They throw these words around. They're trying to intimidate. and Powell is straightforward but also very smart he sees what's going on and this was really crossing I wouldn't say it's the first time they crossed the line but this is really crossing a serious line

So you're an institutionalist as I imagine Jay Powell is and I guess I wonder what this bodes for the Fed as an institution. Powell's out his chair in May there's going to be a new guy, and I say a guy because it's going to be a guy, who will be, if you read the tea leaves and you don't have to read too deep, responsive to the president's wishes, let's say. What do you suppose that means for the Fed?

What do you suppose that means for this economy? Well, I think it means, first of all, the death or at least more abundantness, if that's a word, of Federal Reserve Independence. my guess, and I think it's a fairly well-educated guess, is the same as yours, that nobody is going to get that nomination from Trump without pledging fealty to Trump. That is not the way we have selected Fed chairs in the past. I hope it's not the way we're going to select them in the future, and it makes a mockery of Federal Reserve Independence. last thing sir and then i'll let you go to to all those interviews that are probably calling you um as you know

j powell can stay on the board of governors for another two years what do you think and he has steadfastly refused to say what he's going to do um after his chair uh position ends in may um spitball this for me what do you think he's going to do if you ask me this yesterday i would have said he will leave the board as previous chairs have. Now I'm wondering, I mean, I haven't talked to him about this, but I'm wondering now if he will try to hang on there to preserve what little independence the Fed maintains. You'll have noticed that Tom Tillis has suggested

he won't allow any more Fed confirmations until this legal matter is over. So we may be waiting on that. We will see. Yeah, Tom Teleth Center from North Carolina and some others, too, as a matter of fact, as this day has played out. Alan Blinder is Pressure Economics at Princeton and more to the point he was once a vice chair of the Federal Reserve. Professor Blinder, thanks for your time, sir. I appreciate it.

My pleasure. Thanks. One of the things President Trump thinks is going to happen if or maybe when he gets his way with the central bank and it cuts interest rates the way he wants them to cut, which is to say a lot. One of the things he thinks is going to happen is that the housing market is going to turn around. Housing is going to swing and it's going to be great, are his exact words.

But as Marketplace's Smith-the-Fields reports, that is far from a foregone conclusion. If you listen to this show regularly, you know that when the Fed cuts interest rates, it doesn't necessarily mean that mortgage rates come down. That's because the interest rate the Fed sets is for short-term debt, and mortgages are long-term, usually 15- or 30-year loans. 30-year mortgage rates tend to track very closely with a 10-year Treasury.

Darrell Fairweather at Redfin says most people who get a 30-year mortgage tend to either pay it off, refinance, or move within 10 years. So they tend to track really closely together. And one of the key factors that drives the yield on 10-year treasury bonds is expectations about where inflation might be headed over the long term. The issue with the government intervening with the Federal Reserve's operations is that if the Federal Reserve were to start doing what the government wanted it to do, then investors would get really nervous about long-run inflation.

Just because the president wants lower interest rates doesn't mean that lower interest rates would be good for the economy. George Barrow at Texas A&M University says if investors do start to question the Fed's independence and credibility and get nervous that inflation's going to rise over the long term. I think it's likely, and there are historical studies, indicate that that begins to impact financial markets. We start to see interest rates start to rise, especially on bonds and longer-term loans. It likely would make it a little bit harder to finance, you know, expenditures, business loans, car loans, credit card loans. And mortgages as inflation expectations get built in to interest rates. I'm Samantha Fields for Marketplace. There's a real risk that was

actually happening in this economy, how people and small businesses are getting by. There's a risk that that all gets lost in all the news in Adjada about monetary policy and the dual mandate and the White House going after the Fed criminally. So we're going to fix that right now. Marketplace's Carla Javier is going to do it. Small business owners seem particularly concerned about the tight labor market, says Holly Wade, an economist at the National Federation of Independent Business Research Center. One in five, small business owners say labor quality is their single most important problem in operating their business. Meaning they can't find qualified candidates for open positions.

Wade says small businesses in construction and transportation, for example, still face challenges finding and retaining workers with specific skill sets. Something Dwayne Grohl, CEO of Environmental Design Group in Ohio, knows firsthand. You know, we don't make widgets. Our business is based on professional services. He and the 130 employees at his civil engineering and construction services company deliver designs, oversee projects, and help clients raise funding. And we can't do that without hiring the best and keeping them. And it's challenging when we have a year or two search for someone to fill a position. Grohl says he's looking to hire at least five more experienced employees, and he's raised compensation.

to retain staff. When it comes to stable prices, in other words, keeping inflation under control, NFIB says that's a top concern of businesses in retail, particularly ones that depend on imported goods. Lofty is a 10-person company that sells clocks and lamps that help you sleep. CEO Matthew Hassett says tariffs have made a big impact. We didn't have extra money sitting around waiting to pay these tariffs, so we could either cut expenses or raise prices, and so we've cut everything we can. Including consultants and leaving an open position unfilled. And there's no more to cut.

Hassett has raised prices, too. The lamps that Lofti used to sell for $275 are now almost $300. Hassett says there's been a lot of unpredictability in the U.S. economy, so he's hoping to sell more product outside of the country in the future. I'm Carla Javier for Marketplace. This final note on the way out today, it's about Powell on the face of it, but maybe even more, it's about where this economy is right now, given everything. The last time I talked to him was at a conference at the San Francisco Fed a couple of years ago.

So I wasn't actually going to go to politics this morning because you have a well-practiced answer to that question. But I feel like I kind of have to now that you brought it up twice. it is possible that the Fed is likely even that the Fed is going to become more politicized this year and the first time you and I spoke in 2018 you were in the crosshairs of the president and the administration and I asked you about it and you said you know what

control the controllable can't do anything about it so the question is not what are you going to do about the politics of it the question is what is your fear for the economy if the Fed becomes politicized? It just wouldn't. We wouldn't be the Fed. But the good news is we are the Fed.

Come on, no, no, no, no. That's not answering the question. No, a central bank that is excessively responsive to, you have to look at other countries, basically. And what you see is there's no credibility. Credibility on inflation and on sticking to your knitting, is everything. Because if people believe that you will

accomplish your goals and that you won't deviate from them for reasons like that, then it'll be easier to do so. Markets will react appropriately and in people's thinking, inflation should be around 2%. And if they think that way, then it probably will be around 2%.

So if you look at other, I think, of more emerging countries where they have weaker independence or a lack of independence, it's just, you know, it's hard to have price stability or maximum employment. So that's what would happen if that were to happen. But it's, I'll insist upon saying that's not the world we live in.

It wasn't back then. But I'm going to say it one more time. The institutions of this economy depend on the institutions of this democracy. Amir Bibi, Katelynash, John Gordon, Neuerk, and Stephanie Seek are the marketplace editing staff. Kelly Silvera is the news director. And I'm Kai Rizda. We will see tomorrow, everybody. This is APM.

Hey, it's David Brancaccio, a host of the Marketplace Morning Report. It has been one year since the costliest set of wildfires in California history, U.S. history, and by at least one calculation, the history of the world, 16,000 structures were destroyed, most of them homes. I can quote your figures about insured versus uninsured losses measured in billions. But as people in the fire zones face year two, we go from macro to micro. I'm checking in with the neighbors on one street in Altadena, where 15 homes were destroyed on a single block. These are my own neighbors. I lost a home on that street, too. Join us for on-the-ground reporting as we hear from people still dealing with insurance, getting permits, finding contractors.

One guy had to go through 30 contractors to find one with the right skills he could afford. Plus, for most, rebuilding is taking years. How do people find the money to live elsewhere? Listen to the Marketplace Morning Report using your favorite podcast app.