ADRIAN MA, HOST:
Should the president have more control over the country's central banking system, also known as the Federal Reserve? Well, former President Donald Trump thinks so. Here he is speaking to reporters at his Mar-a-Lago home this month.
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DONALD TRUMP: I feel the president should have at least say in there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful, and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.
MA: Now, when Vice President Kamala Harris was asked about this, she gave a very different take.
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VICE PRESIDENT KAMALA HARRIS: The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes.
MA: The Federal Reserve is the most powerful economic institution in the country, arguably the world. And with two presidential contenders disagreeing over how they'd handle it, well, seems like a good reason to kick things over to the show that I usually host, NPR's The Indicator From Planet Money podcast. My cohosts, Darian Woods and Wailin Wong, will take it from here and explain how the Fed became independent in the first place and why most economists wanted to stay that way.
DARIAN WOODS, BYLINE: The Federal Reserve, the U.S. central bank, has two big goals - keeping prices stable and jobs plentiful. And its decisions are independent from politicians when it takes actions on things like changing interest rates to lower inflation, which we're laser focused on today.
WAILIN WONG, BYLINE: Right. We learned that the Consumer Price Index rose 2.9% year-on-year in July. That's a huge improvement from mid-2022 when inflation was over 9%. University of Texas at Austin economist Carola Binder reckons that decrease was accelerated by the Fed's independence from political meddling.
CAROLA BINDER: The Fed's job was made easier by its independence, and inflation could have been even worse had the Fed not been independent.
WOODS: Raising interest rates is a challenging lever to pull. This brings down prices by slowing the economy down. It makes new mortgages more expensive. It puts people temporarily out of work. So it's not a popular line of action for any politician.
BINDER: 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.
WONG: The Fed has more credibility. Investors and the public generally believe it'll try to do what it takes, and that's important in getting the job done.
WOODS: And when we say the Fed is independent, we don't mean it's completely separated from democracy. While the 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.
WONG: 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.
WOODS: 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 U.S., 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 - aka monetary policy.
BINDER: 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.
WONG: That didn't mean that presidents didn't try to influence the Fed. Like, think of Arthur Burns, fed chair in the 1970s.
BINDER: Most famous would be Richard Nixon when he was pressuring Arthur Burns for looser monetary policy to try to help his reelection chances.
WOODS: 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.
BINDER: As economists came to recognize the benefits of transparency and of independence, it kind of became more accepted and more part of the culture at the Fed and even the culture at central banks around the world.
WONG: The Bank of Japan, the Bank of Mexico and the Bank of England became independent in the 1990s. The European Central Bank was built as independent from Day 1, and the evidence suggests that independence works to control inflation.
WOODS: Carola Binder at UT Austin says in the U.S., the consensus grew that central bank independence was a good thing, and this led to a norm. Presidents were letting the central banks do their thing, until the 2016 election, when Trump started publicly and loudly criticizing the Federal Reserve. That continued into his presidency. He appointed Fed Chair Jerome Powell but started making these public swipes against him from 2018. This was a major shift in the president's relationship with the Fed.
BINDER: There had been a norm for many years that the president wouldn't - well, I don't know which presidents had Twitter, but they wouldn't go on Twitter or something like that ranting about the Federal Reserve. So that was a shift in kind of what was seen as acceptable for a president to do.
WOODS: And with Donald Trump's comments now, it seems that he's saying if he's elected, there might be more structural change giving the president more input. Donald Trump's vice presidential candidate, JD Vance, supported this in a speech earlier this month.
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JD VANCE: If the American people don't like our interest rate policy, they should elect somebody different to change that policy. Nothing should be above democratic debate in this country when it comes to the big questions confronting the United States.
WOODS: Carola says these comments are revealing.
BINDER: You frequently have presidents who disagree with what the Federal Reserve does. They almost always disagree on the side of - we should have looser policy; we should have lower interest rates. So it shows you, well, if we had left monetary policy in the hands of the president, we would have had more inflation.
WONG: That said, Carola says the public does want accountability. Like, how did we even get such high inflation? What went wrong? How can we avoid that happening again?
BINDER: The Fed should give them that kind of accountability, should be transparent about the mistakes they made and what they've learned and what they might change.
WOODS: Carola does think there is a grain of truth there in the frustrations that might lead someone wanting a politician to strong-arm the economists. Think about what we've been through - the high inflation, the pandemic and then the global financial crisis before that. The Fed was scrambling to help, of course, and that meant expanding its role and taking on unconventional new action, like buying up tons of mortgage securities and bonds.
BINDER: You can see why there is kind of more calls for more oversight of the Fed or calls to kind of constrain it if it's seen as maybe going beyond what its original intentions were.
WONG: Are we just asking too much of the Fed? Do we want the Fed to solve all of our problems?
WOODS: We do. We ask too much of the Fed and not enough of what we can do ourselves.
WONG: OK, John F. Kennedy.
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MA: That was NPR's Darian Woods and Wailin Wong from The Indicator From Planet Money podcast. Transcript provided by NPR, Copyright NPR.
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