Showdown at the Federal Reserve

Katie Martin (0:06)

Pushkin. Here's Jerome Powell, Chair of the Federal Reserve, speaking on Sunday night.

SPEAKER_2 (0:13)

On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June. I have deep respect for the rule of law and for accountability in our democracy. No one, certainly not the Chair of the Federal Reserve, is above the law. But this unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure. This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress's oversight rule. The Fed, through testimony and other public disclosures, made every effort to keep Congress informed about the renovation project. Those are pretexts.

The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President. 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.

Katie Martin (1:25)

Oof. Mic drop. Hey, Rob, I mean, what on earth is going on here?

Robert Armstrong (1:31)

It tells you something that everyone was astonished by that speech, because all that was, was a man saying something we all know to be true. Every single person knows to be true. And it tells you something about the dialogue around our political system, that this is, you know, somebody just speaking plainly about what is obviously true, is a mic drop moment.

Katie Martin (1:56)

And that thing that is true is the independence of the Federal Reserve, the US Central Bank, the world's most important financial institution is in jeopardy. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London with plenty to write about. And I'm joined through the magic of technology all the way from New York City by that guy, the slightly stunned Rob Armstrong off of the Unhedged newsletter. Rob, Central Bank is normally talking code very, very politely. This was not that, was it?

Robert Armstrong (2:34)

This was really remarkable. And for me, it was an extremely heartening moment because it was kind of non-hysterical, concise, and absolute all at the same time. And I just thought it was great. And he did, with that plain speaking, he allowed a lot of good things to happen. I think he gave cover for Republican politicians to say, okay, now you've gone too far, Mr. President. And I think he allowed markets to breathe out and realize this may be, there is a line here on Central Bank independence that won't be crossed.

Katie Martin (3:26)

Yeah, this will not stand, right? So for people who are not familiar with how Central Bank communication works, these things are very tightly choreographed and very well planned and all of that. It is very, very unusual for the Fed to come out and make an unscheduled statement on a Sunday night. That's the sort of stuff that's normally reserved for, Lehman Brothers has just died, or there's a massive pandemic going on and we need to pull the emergency cord or something like that. So just the fact that they said anything in this sort of forum is extraordinary. But yeah, it was absolutely a case of, you guys have been on our case for months. You have tried to get rid of Fed Governor Lisa Cook, and that's going through the Supreme Court at the moment. We should have a resolution on that in the next few weeks. You have constantly beaten up on us for not cutting interest rates as fast as Trump wants us to. You've made all sorts of weird, spurious suggestions about the renovation of the Federal Reserve headquarters, which sure, they're running over budget, but it's a building project. These things run over budget.

Robert Armstrong (4:33)

A government building project. Yeah.

Katie Martin (4:36)

Yeah, exactly. So and Powell is just effectively saying in this statement on Sunday, knock it off. Like we've got a job to do and it's incredibly important that we're not subject to political intimidation when we're making decisions on interest rates. And yeah, I mean, I was kind of blown away by this challenge. I thought finally someone's standing up to what's going on here.

Robert Armstrong (5:05)

Yeah, it was very impressive. And I think you have to bear in mind that while for most of us, what we do is more important than what we say, in the case of central bankers, what they say is more important than what they do. Central bankers, a key part of their job is convincing the world that they will do in the immortal words of Mario Draghi, whatever it takes. And they don't actually do that much. Their job is to make people believe that if things really go sideways, they will do everything, even while they are not doing very much.