The Federal Reserve's Tricky Economic and Political Terrain, Explained

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Hey, it's Sarah. The United States, as you probably know, is in the middle of a complicated economic moment. The Federal Reserve has been working to bring down inflation without triggering a recession, and that challenge is tricky in an election year. So today I'm turning the mic over to my colleague Saliah Mosen, who has covered the Fed for years. Here's Seleia.

Last week, the halls of Congress were a buzz.

Committee will come to order.

It was a big day for the House Committee on Financial Services.

The Federal Reserves semi annual Monetary Policy Report, an inventive title we use semi annually here on the.

Committee, in case you missed it. That is a little bit of Federal Reserve style of humor from Committee Chairman Patrick McHenry.

I see Chairman, pal smile. It's just three hours.

In the hot seat. For those three hours is Room Powell, who doesn't joke around much, and for good reason. He's the chair of the Federal Reserve. His decisions about interest rates, move markets and the entire economy. Not that you'll hear that from him in start contrast to almost everyone else in Washington. Powell shies away from dramatics. He's intentionally kind of boring and tends to downplay the power of the fed's actions. Listen to his response to Gregory Meeks, a New York Democrat.

Inface it is also now coming down faster than any place else on the planet, just about Is that not correct?

I think that's right.

Yeah, Powell's response is pretty bland, But bland is kind of the point for the FED chair. When Powell speaks, markets move, so he doesn't want to be dramatic or declare mission accomplished.

We wouldn't be, you know, declaring victory.

Like that, or do anything that people might interpret as a hint to what FED policy will look like.

In the future.

He's special, doesn't want to say anything that might be seen as political, and that puts him in a really tough spot right now, because the US economy is at the center of the twenty twenty four election and the decisions that Powell and the FED may have a powerful effect on the economy that each candidate hopes will hand him the White House. Today on the show, I speak with Bloomberg Fed editor Kate Davidson about the Central Banks politics problem. And the growing pressure on J. Powell.

The closer we get to the election in November, we can expect that things are going to get a little spicy.

Can the FED battle inflation in the glare of electioneer politics all while maintaining its independence from Bloomberg's Washington bureau. This is the Big Take DC Podcast.

I'm Salaiah Mosen.

I've covered economic policy for years from the White House, angle, the Treasury Department, Congress, the FED. I even have a book coming out all about the dollar, so I can get pretty wonky. But someone who never gets bored talking policy with me is my colleague Kate Davidson.

I lead our Federal Reserve coverage, and honestly, when I first came to Washington and I got into covering the banking industry and regulation after the two thousand and eight financial crisis, I kind of found myself thinking, like, how did I stumble into this? How do I explain this to people? It feels so removed from my everyday life and what seems important to me? But I quickly realized it is so important.

Kate was my arch rival at the Wall Street Journal and political for years. We were always competing for scoops, but now we're scooping for the same team, and there's nobody better to break down the job of the Federal Reserve.

So the FED is charged with basically managing the economy. And the primary way that the FED affects our lives is by influencing the cost to borrow money.

The cost to borrow money as an interest rates. When the FED wants people to spend more, you know, juice the economy, it lowers interest rates, so it's cheaper to borrow. When it's cheaper to borrow, people and businesses spend more, they buy more, invest more. That grows the economy. When the FED raises interest rates, people borrow less, they spend less, and the economy slows down.

So credit card rates, auto loans, mortgages, all of these things are influenced by the rate that the FED sets.

Now, one thing that you said was a little bit confusing. Why would the Fed want to slow down a consumer driven economy.

Yeah, well, it all goes back to inflation.

Inflation meaning price is rising. The FED likes to see prices rise at a predictable rate a little bit every year. It means the economy is healthy. But over the last few years, prices have risen a lot. When inflation gets too high, it's bad for the economy and for people. Higher prices mean each dollar you earn buys you less. That's why your grosser bill has been so much higher recently. To bring prices down, meaning slow inflation, the central Bank's main tool interest.

Rates, and so really the primary tool the FED has with interest rates is to try to what they say is cool demand, is to slow down spending. That's really the whole game for the Fed. They have to try to discourage people from spending money.

Between March of twenty twenty two and July of twenty twenty three, the FED raised interest rates eleven times. That brought down prices, but it also slowed the economy. And many economists saw this and said the Fed is going to trigger a recession. But that recession never came. And now those same economists are saying that j. Powell and the Fed have pulled off a so called soft.

Landing, trying to make sure inflation comes all the way back down to a level they think is appropriate for healthy economy without causing a big downturn in the labor market, without having tons of layoffs.

Not everyone's convinced the economy is working for them. So far, unemployment in the US is near record lows and prices have come down a lot. A soft landing would be a big win for Powell.

He's an interesting guide. He's not an economist. You know, a lot of FED leaders typically have been these PhD economists, and J Powell as a lawyer, he kind of stumbled into this role. As a FED governor. He had played a really pivotal role during the debt sealing crisis in twenty thirteen. He was seen as someone who could reach out to Republicans on Capitol Hill and explain to them why it would be a terrible thing for financial markets if we were to breach the debt ceiling.

Powell has been working at the Federal Reserve for years. He was nominated as chair in twenty seventeen by President Trump and then confirmed by the Senate, and President Biden kept him in that role when he took office. He seems to be really well liked by a lot of people.

I think he's pretty even keeled, and I think that people really appreciate that he's pretty plain spoken because he's not an economist, so he tries to explain things very simply, and he I think realizes that he's speaking to the American people. He's speaking of financial markets, of course, and that's really important, but he doesn't lean into these very complicated economic ideas.

Doesn't he play the electric guitar?

Yeah, he plays the guitar. He's a big grateful Dead fan. He was spotted at a concert in the Washington area last summer at a Dead and Company show. He was asked about it when he was testifying on Capitol Hill.

Oh, it was terrific.

What can I say? So it was great. I've been a grateful Dead fan for fifty years.

Is he in touch with the average American? Because I know he's a member of a couple of country clubs or exclusive clubs that have like twenty fifty thousand year entries.

And that's sort of the knock on him, right, He is a Beltway inside. Or he might say he went to Georgetown Prep in Washington, which is where Neil Gorsich and Brett Kavanaugh also went to school. I mean he worked at the Carlisle Group. He certainly is very wealthy and wealthier than most Americans, and so I think that I don't know that you could say he's exactly relatable, but he tries.

So Powell is dealing with the economy, but the economy isn't Powell's only consideration. He is dealing with some political pressures. Can you talk a little bit about what Powell is dealing with in twenty twenty four a presidential electioneer?

Sure, so, as if it wasn't hard enough to manage what they call the soft landing, right, kind of layered on top of that is this election. The Fed and J. Powell will always say, and they emphasize over and over and over again that the election and the politics of these decisions, they are just not a factor. They are looking purely at what's best for the economy.

But of course the economy is one of the key indicators of whether an incumbent president will win reelection. For Biden, then it's crucial that the economy stays strong. To a certain extent, He's based his campaign on the triumph of Bidenomics.

And yet a lot of polls the voters have more trust in the former president Donald Trump to steer the economy. And so I think that for the Biden White House, they want to see this healthy economy continue.

And here's where all the pressure comes in for Powell. Cutting interest rates now would make borrowing easier, boost spending, and give the economy a little kick. Leaving rates where they are could mean parts of the economy plateau or even suffer.

Democrats have been saying, hey, it's time to cut rates. Are too high. You're risking the economy. There could be a downturn. But if and when they start cutting rates this year, there will be criticism from the right that they're probably doing it to help Democrats. Right. We did already hear the former president a few weeks back.

This is Trump on Fox Business last month.

It looks to me like he's trying to lower interest rates for the sake of maybe getting people elected.

I don't know. Listen to his tone. It's almost like he's winking at the audience.

So you think he's political.

He's just going to cut rates to hell lighting it.

I think he's politically. In a few other countries, this is actually the way it works. The president or the prime minister can call up the Central Bank and say lower rates. That's an order.

Not in the US. That was Congress in nineteen thirteen. The Federal Reserve Acts, so a very long time ago, they established this idea that the FED is independent, there's not meant to be any sort of political influence on the process.

Why is the reality and the appearance of independence for the FED so important?

Well, I think that they need to be viewed as credible. Right.

If politicians can come in and move interest rates around whenever they want, that can really mess with an economy. A central bank's neutrality means it can do things like raise interest rates, which might hurt in the short run, but also prevents inflation from spiraling out of control.

There's a lot of research to suggest that countries where there is more political pressure, they tend to have higher inflation over time.

So maintaining that independence is good for the economy in a very real way.

For sure.

When US presidents are supposed to respect that independence, you know, let the central bank do its thing. Which is why it was a little bit shocking when Biden said this at a campaign event in Philadelphia last week.

Guess what, I can't guarantee it, but I bet you. I bet you that might come down more because I bet you that that little outfit that sets interest rates it's going to come down.

Why do you think he said that I don't know.

I certainly was surprised when I saw the alert on my phone or the email traffic in the Bloomberg News run because it is a little bit unusual. It wasn't saying anything controversial. It was more just observing what he thinks is likely. But even still that that's unusual.

Unusual and maybe not in a good way. The White House has already had to clean up after Biden's comments. Here's Press Secretary Kareein John Pierre on Tuesday, right.

I just want to be really clear, unlike previous presidents, the president does very much believe on the importance of the fit being independent.

That the previous president she doesn't want to name is Trump. He broke with a twenty five year tradition of presidents trying to stay out of the Fed's lane. And when that happened in twenty eighteen, Kate and I were both beat reporters who got a front row seat to the theatrics that's coming up. As President Trump broke with the tradition of the executive branch remaining publicly neutral about the actions of the Federal Reserve. My colleague Kate Davidson and I covered it closely.

As beat reporters.

Do you remember what it was like when we heard that President Trump back then was considering firing J. Powell the sitting FED chair. I mean it was pretty unthinkable, right.

He had been complaining about the FED chair pretty openly in a way that reporters and the public and the fedge hadn't seen in many, many many years, in a way maybe they'd ever seen in such a public way. You know, there had been reports and stories of previous administrations maybe reaching out behind the scenes, but this was on Twitter, right.

He called J. Powell a bonehead.

Yes, I'm trying to think that there was mone you know, he think he said he was like a golfer with no touch, or he couldn't nail the pot or something like that. You know, he had a lot of I mean, it was it was funny, except that it was alarming in some ways. I think then we found out I think it was uselely how that broke that story, right, that that actually, in private, he was really searching for ways to replace the FED chair.

Yeah. It ruined a lot of people's Christmases because it was Christmas. Because if a president could meddle in monetary policy, the US dollar, and the entire global economy could be shaken. That story I helped report was the breaking news grinch that stole Christmas that year. It triggered a nearly three percent drop in the S and P five hundred. Immediately, investors everywhere worried that Trump's beef with Powell could put

I think that's something that's unique about Chair Powells. He's very much aware of where lawmakers are and risks to the FED. I mean, I think he definitely thinks about it from the perspective of risks to the institution, right, and that they don't want to be perceived as leaning one way or the other for political reasons. Of course, And he was on sixty minutes recently, and yeah.

He went on sixty minutes. One of the main messages that he had was to assure the public We're not going to be influenced by politics. We're above the fray. Even though it's twenty twenty four, you know.

I would just say this integrity is priceless.

Notice how he pretty much says the bare minimum at the.

End, that's all you have, and we plan on keeping hours. I mean, I feel like that's the quote that's going to be, you know, in his biography one day. I think that's genuinely how he feels. They don't want to risk that.

It's unusual for a FED chair to go on primetime to talk about his job. Usually we hear from him at press conferences, meticulously prepared speeches, or at those twice a year hearings. Last week's kicked off with Patrick McHenry, who you heard earlier. He's a North Carolina Republican and chair of the House Financial Services Committee, which oversees the Fed's work. He essentially gave Powell a warning.

It's highly inappropriate for lawmakers to attempt to influence monetary policy, jar Pal, I have faith that you will not allow politics to cloud your judgment in the fight to tackle inflation.

The way I hear it, this lawmaker is saying, we're watching you. And during the rest of that three hour hearing, Powell was in the hot seat from lawmakers on both sides of the aisle.

I think that he've used it as a really important part of his job to be going up there and listening, talking to lawmakers, finding out what their concerns are. I think some lawmakers obviously are frustrated they're hearing from their constituents about, for example, the high cost of housing right now, housing affordability, like.

This criticism from Massachusetts Democrat Ayana Presley eat.

The FED to start cutting because like the rent, interest rates are too damn high.

You can hear Powell try to toe the line as he's under fire. He's really careful not to say anything that could be perceived as political. When Al Green, a Democratic congressman from Texas, prompts Powell to reassure the public that the US has successfully avoided a recession, he doesn't take the bait.

Will there would be some official statement that would give people some comfort.

I don't think by us, No. I think we're just going to keep our heads down and do our jobs and try to deliver what the public is expecting from us. We wouldn't be, you know, declaring victory like that.

Kate Trump, we know, has already talked about getting rid of Powell. You would think someone whose job might disappear soon would take a moment to boast about what they've done. But Powell doesn't do that here. Why not?

No, I mean, I just think the idea of announcing mission accomplished is just not in the Fed's DNA as an instant action. It's a good question. I mean, I think they probably would view that as maybe sort of political. He's going to let the politicians, I think, do the talking and say probably as little as possible. There's not going to be a lot of patting himself on the back.

It's a tough needle to thread, though, because the economy and politics can't be separated so easily. The Fed's decisions are based in part on economic policies installed by Congress and the executive branch. Part of Powell's job is keeping tabs on those policies. Will there be more or less immigration? And how will that affect the labor market? Will the twenty seventeen tax cuts be renewed by the next administration.

I mean, they're certainly going to try. The next president, whoever it will be, will play a role in deciding who is going to be the next FED chairman, whether they're going to keep J. Powell, whether they're going to replace him with somebody else. I have no idea if he wants another four years in this job. It's been pretty crazy the time he has been at the HELM.

But J.

Powell is going to have to contend with a lot of noise from a lot of lawmakers on both sides of the aisle this year.

And the closer we get to election day in November, the more the Fed's actions will be put under the microscope.

If the FED is cutting rates around that time, we will probably hear from Donald Trump and from others his allies really complaining about this.

Meanwhile, the FED isn't out of the woods yet. They still haven't nailed the soft landing, and some people think a recession might still be in the cards.

Look, the FED I think was and maybe still isn't a really precarious position. I mean, they've been really successful, fortunately for them and for Powell, in bringing inflation down without this big rise and unemployment. Nobody thought they could do it, so that's been good. But I think they haven't totally finished the job, and that will be I think really important for j Powell personally. It's certainly important

Until then, we can expect Powell's neutral balancing act to continue as election politics rage around him.

And with that, the hearings adjourned.

Thanks for listening to the Big Take DC podcast from Bloomberg News. And if you want to geek out more about economic policy and the dollar, I have a book coming out next week. It's called Paper Soldiers, all about the Treasure Department and how it's used the dollar to help secure the US's place in the world. I'm Salaiah Mosen. This episode was produced by Julia Press. It was edited by Stacy Van Nix, Smith and Matt Bosler. It was mixed by Ben O'Brien. It was fact checked by Stacy