What happens if Trump takes over the Federal Reserve?

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On the 16th of July, the markets on Wall Street opened at 9.30 sharp, just like they do every other movie.

The only odd thing about it was the US President's son Donald Trump Jr.

was the one ringing the bell, touting a new online gun shop.

To the big board, it's grab a gun, an online firearms retailer, Donald Trump Jr.

on the board of directors on the podium this morning at the NASDAQ.

The president's big boy son being a weapons merchant is totally normal these days.

This routine USA-ing and bell-dinging lasted for an hour and 23 minutes.

And then something shifted.

Hey, Frank, a very fast-moving story here.

But first, I did confirm with a senior White House official just in the last hour that the president was indicating he was likely to fire Jerome Powell soon.

Jerome Powell, the chair of the U.S.

Federal Reserve, was apparently about to get sacked.

Trump had reportedly shown Republican Party lawmakers a letter that he drafted sacking Powell in a meeting the previous night.

And during that meeting, we are told that he asked lawmakers if he should fire Jerome Powell, the Fed chairman.

Trump is going to fire Jerome Powell soon.

Oh, really?

Even the mere suggestion of this news was enough to send the markets into a tailspin.

In the following few minutes, the U.S.

equity market saw $200 billion evaporate.

And the market doesn't like it.

Looks like they love Powell.

After a 40-point drop on the S ⁇ P 500 index, Donald Trump was asked about this news.

You know, I talked about the concept of fire him.

I said, what do you think?

Almost every one of them said I should.

For the record, it's unclear if it's even legal for the president to fire Powell, but when's that ever stopped him?

I think he does a terrible job.

He's costing us a lot of money.

He's a terrible Fed chair.

I was surprised he was appointed.

I was surprised, frankly, that

Biden put him in and extended him.

To be clear, this terrible Fed chair who was doing a terrible job was actually appointed by Donald Trump back in 2018.

After tossing this idea around a little bit, Trump told reporters he was not going to fire Powell.

So he's doing a lousy job, but no, I'm not talking about that.

Almost instantly, the markets relaxed.

Everybody chilled out for now.

But at the beginning of 2026, Jerome Powell's term as chair is coming to an end.

So it's all going to start up again.

And we'll pick somebody that's good and we'll pick somebody.

I just want a fair job.

And there's serious concern that Trump is about to pick a sycophant who will do just whatever he asks.

We want to see lower interest rates.

Our country deserves it.

The thing is, the financial markets really take this seriously.

They really don't want Trump or any American president messing around with the U.S.

Federal Reserve's decision-making on interest rates.

But the strict independence of central banks like the Fed is a very new thing.

The separation of monetary policy from the government only happened relatively recently.

So today we're going to talk about the surprisingly fascinating story of how we got central bank independence and what might happen if Trump takes that independence away.

I'm Matt Bevan and this is If You're Listening.

By the way, yes, I know I can hear it too.

I've spent the last couple of weeks dealing with the flu.

I was meant to be on a nice family holiday on Kigari,

but I spent most of it hacking up a lung in the back of a four-wheel drive.

I'm almost better now, but the voice isn't quite back to normal, so I hope you'll bear with me though.

Okay, you ready?

Now, another thing with crotch down where your nuts hang is always a little too tight.

Back in the 60s and 70s, we knew a little bit too much about what was going on in the Oval Office.

So when you make them up, give me an inch that I can let out there uh because they cut me.

It's just like riding a a wire fence.

This is U.S.

President Lyndon Johnson putting in a special order for pants as recorded by the Oval Office tape recording system.

The President apparently quite liked these pants but felt they needed a little bit more space in the crotch.

Round under my back of my bunghole.

When Johnson and his bunghole left office in 1969, his successor, Richard Nixon, had the tape recording system removed.

But in good news for us, it was then reinstalled in 1971.

I'm never going to discuss the son of a bitching Watergate thing again.

Never, never, never, never.

Fortunately, there were fewer mentions of the president's nuts on Nixon's recordings, but that was more than made up for with stuff like this.

How are you, Lisbrough?

Hi, how are you?

Fine, did you have a good trap?

Oh, yeah, I just got back from Chicago.

This is Nixon speaking to the chair of the Federal Reserve at the time, Dr.

Arthur Burns.

Look, I want you to know that we are reducing the discount rate today.

Oh, I see.

And that will be announced around four o'clock.

Yeah, right up the market, right?

After telling Nixon that interest rates were going to come down that afternoon, Burns offered Nixon some tips for how to use this in his dealings with Congress.

This may help you when you talk to Mr.

Patman.

Of course, you can tell him when it's true.

Hell, you're eager to have interest rates come down.

Now, if Nixon was having this conversation with one of his cabinet members, the Secretary of the Treasury, for example, it'd be totally fine and normal.

But Burns wasn't in Nixon's cabinet.

He was theoretically totally apolitical, interested only in the health of the economy, and not involved at all with Nixon's political schemes.

And look, it's worth a quick little lesson on what the Federal Reserve and other central banks are.

Because even though the work they do is very important...

Central banking is a strange profession little understood by members of the public whose interests it exists to protect, by governments with which it shares responsibilities, or by financial institutions whose activities it to some degree controls.

So the easiest way to understand this strange but very important profession is by knowing the difference between monetary policy and fiscal policy.

Watching business news, it can be easy to think that these terms are interchangeable.

What's the difference between fiscal and monetary policy?

Physical.

Fiscal?

Fiscal.

And monetary?

Fiscal.

No, no.

Sorry.

Ignorance.

Okay, so fiscal policy is what the government does.

Collecting taxes and then spending the money it collects on stuff.

The best way I can think of to remember that is to say say that fiscal sounds like the government's taking a fist full of cash out of your pocket and spending it on stuff.

Monetary policy is easier to remember because it's about the creation and flow of the money itself.

I know monetary policy is concerning money.

Money, monetary.

And this is the one that the central banks control.

The Federal Reserve Banks issue most of the currency we use.

And they also influence the lending and investment policies of commercial banks by utilizing a variety of economic tools.

The key one of those tools being interest rates.

It sets interest rates and through that the cost of borrowing and the value of our dollar.

Basically, when rates are low, money is cheap to borrow.

And when rates are high, borrowing money gets more expensive.

Of course, nobody likes paying higher interest rates.

So why would the bank ever increase them?

We are confronted with the problem of inflation.

And the Federal Reserve Board plays a very great role in determining whether that inflation will be checked and how it will be checked.

Inflation.

If you have low interest rates, lots of money being printed and unemployment is generally low, that means that people have more money to spend, which seems like a good thing.

But when people have more money to spend, prices tend to go up, which means a lot of inflation.

At the consumer level, level, America may not look much like an economy in distress, but in shops and supermarkets and the residential suburbs, inflation is now beginning to bite hard.

So at the simplest level, central banks are anti-inflation machines.

As the government fiddles with taxes and spending, they fiddle with money supply, monetary policy, to try and prevent inflation.

It sets interest rates and through that the cost of borrowing and the value of our dollar.

So that's how it should work in theory.

But right from their establishment through to the Nixon era, central banks were really bad at their job.

I'm an economic scientist and I'm trying to observe phenomena and I observe that every Federal Reserve chairman says one thing and does another.

This is the famous 20th century economist Milton Friedman grilling a former Federal Reserve chairman.

He wants to know why despite it being the Fed's job to stop inflation, there was high inflation followed by high interest rates and recession about every 10 years from the 20s to the 70s.

Why is it that there's been such a wide divergence between the excellent pronouncements on the one hand and what I regard as a very poor performance on the other?

By the 70s, Friedman thought the whole experiment of central banks had been a failure and should just be shut down.

And that was because, as one of the former Fed chairs said, the independence bit doesn't really work quite as planned.

I've talked for a long time about the independence of the Federal Reserve.

That's independence within the government, not independence of the government.

See, the independence of the Federal Reserve was a bit of a joke.

The government of the day could still influence its decisions, which is why when Richard Nixon called the chair of the Federal Reserve to chat about some of his ideas, he expected to be listened to.

You see, Dr.

Burns, that's a standing vote of appreciation in advance for lower interest rates and more money.

This is Richard Nixon appointing Arthur Burns to the role in 1970.

Ladies and gentlemen, as all of you know, the Federal Reserve is independent.

I respect his independence.

However, I hope that independently he will conclude that my views are the ones that should be followed.

Ha ha ha, good one.

In 1971 and 72, Nixon's views were that Burns and his team at the Fed should not under any circumstances increase interest rates because it would affect his ability to get re-elected as president.

Voters hate high interest rates.

Inflation was increasing though and Burns wanted to raise interest rates to curb it but Nixon was not having it.

You feel as far as Arctura money supply we've got that about as far as we can turn it right now have we?

I mean as far as my influence on him, that's what I'm really at.

Nixon said he would exert his influence by controlling who Burns could hire and fire to be on the board of the bank.

He's just got to realize that I'm not going to let him name these people.

Over the next few months, things got ugly.

Nixon dropped stories into the press to raise pressure on Burns.

One story claimed that Burns had asked Nixon for a pay rise when he had in fact suggested a pay cut.

Nixon told Burns to hold off raising rates as long as possible so it wouldn't negatively affect his re-election prospects.

And Burns agreed.

It worked.

Nixon was re-elected but by then Burns had waited too long to raise the interest rates and inflation was spiraling out of control.

Inflation stops nowhere and in the last 12 months the cost of food has risen 18%.

So high I can't get over it.

So what?

Everyone's feeling it, but about all American families say they can do about inflation is pay those rising prices.

Americans ended up with high inflation and then even higher interest rates to bring it back down.

The Federal Reserve's activities in trying to hold down interest rates have put us in a position where we have the highest interest rates in history.

It was a terrible mess, and the U.S.

took years to drag its way out of it.

They weren't alone, though.

Inflation was a problem all over the world.

Inflation.

I could do an awful lot more money, that's for sure.

A few months back I can buy this for 20 cents.

Now 24 cents.

Now 24 cents there and in other stores

I notice it's up to 31.

For many ordinary people it's now an uphill struggle to balance the family budget.

Remember a couple of years ago during the pandemic when we were all up in arms about annual inflation rates ticking up over about 5% a year?

Australia, the US, Canada, New Zealand and the UK spent the entire 1970s and into the 80s above that level of inflation.

The central bank anti-inflation machine was broken everywhere.

Well,

not quite everywhere.

This is Germany as we know it today, transformed into a place a lot of people would like to live in.

West Germany, the Democratic bit, allied with the US, managed to keep inflation under control all the way through the 1970s.

How?

Well, in part, it was because the central bank in Germany, the Bundesbank, was genuinely allowed to say and do whatever it thought was necessary to curb inflation without government intervention.

We are very independent of the government, from the government, but on the other hand, we are an advisor of the government,

also on their budget deficits.

The head of the Bundesbank, Otmar Emminger, was able to raise interest rates to counter inflation, even if it was going to be unpopular and even if the government told him not to.

I must, however, warn you, it's not so easy as it looks

if you just say governments have to have the courage to persist in that course.

The Bundesbank did what it thought was right and the government just had to cop it.

Every country that has had the courage to persist in a policy of slow monetary growth has been able to cure inflation.

and at the same time achieve a healthy economy.

As far as government institutions go, the Bundesbank was very strange.

Kind of anti-democratic, really.

Here you have a bank that doesn't have to answer to shareholders or voters, making decisions purely based on the expert opinion of the board and its chair.

If the Bundesbank decided it was best for the health of the economy to raise interest rates, nobody could stop them.

Even if it meant driving up people's mortgage repayments, increasing unemployment, or even triggering a recession, there was very little the actual elected government could do except complain about it.

Here's the thing, I mean, giving the central bank so much independence meant giving away power, something that governments almost never do.

Governments don't let some random unelected bureaucrats unilaterally decide which roads get built, which taxes get cut, or which countries they go to war with.

But the chronic inflation of the 70s and serious economic instability in the 80s were very bad.

And soon, other developed countries followed Germany's lead.

By giving more independence to the Bank of England, Labour hopes to reassure the markets that there'll be no going back to the bad old days.

When New Zealand followed suit, for instance, their Reserve Bank was made independent and told to keep inflation below 2%

or else.

The governor of the Reserve Bank has every incentive to make sure it doesn't.

He'll lose his job if it does.

It was actually written into the governor's contract that he would be dismissed if inflation went too high.

So there's a risk that I could be dismissed.

But on the other hand, at the end of the day, I've been given independence to run monetary policy.

It's reasonable therefore I should be held accountable for the outcome.

And putting monetary policy in the hands of technocrats seems to have worked pretty well, depending on your point of view.

If you measure the status of an economy by GDP growth, a healthy stock market and low inflation, then it's worked fantastically.

If you're more concerned about inequality and whole generations being locked out of the housing market, then well it hasn't worked very well at all.

Of course central bankers would say that's what fiscal policy is for.

Monetary policy is not the only element.

Fiscal policy is equally important.

Taxation.

Yep.

They're raising revenue.

And spending.

And spending.

And deficits.

And deficits.

Blah, blah, blah.

Fiscal, whatever.

The point is, the financial markets love the current situation where pesky politicians can't mess around with monetary policy.

We have seen in other parts of the world that when you have an independent central bank, that interest rates don't have to be as high over the longer term as they would be if you didn't have an independent central bank.

So this I would regard as being good news for financial markets.

Most developed countries enjoyed low inflation and low interest rates through the 90s, 2000s and 2010s.

When inflation began to increase in the wake of the COVID-19 pandemic, most central banks around the world acted as they're supposed to, raising interest rates to squash inflation and then lowering them as inflation decreased.

It meant in the short term a great deal of financial stress for a great deal of people, but around the world inflation has stabilised and is back under control, which is good.

Well, to be fair, it didn't happen everywhere.

So Turkey tried a new and very different experiment.

However, it has only increased the cost of living in Turkey.

In Turkey, the president fired a series of central bank bosses who suggested raising interest rates and appointed board members who would cut them instead.

And it went about as well as you would expect.

Partly to blame for the rampant inflation is President Regip Tayyib Erdogan's decision to promote growth by lowering interest rates, the opposite of conventional economic wisdom.

As a result of Erdogan's meddling, the people of Turkey found themselves going back to the bad old days of spiraling inflation.

Turkey's official inflation rate increased to almost 80% last month, the highest in 24 years.

It's meant that the economy has ground to a halt.

Unemployment is up, the cost of living has skyrocketed, and the housing crisis has gotten even worse.

Financial markets are terrified of this happening in America, which explains why anytime there's any perceived threat to the independence of the Federal Reserve, there's a big reaction on the markets, like the one we saw on the 16th of July, where $200 billion was deleted from the market in a matter of minutes.

Right now, Donald Trump is pursuing what financial experts see as a dangerous combination of fiscal policies.

He's increasing government spending.

Well, I like one big, beautiful bill, and I always have, I always will.

He is increasing prices on imported goods by imposing tariffs.

Smart tariffs will not create inflation, they will combat inflation.

And in terms of monetary policy, he's demanding that the Federal Reserve cut interest rates.

We have to get interest rates lowered in our country.

Our country is the hottest in the world right now, but pretty much unable to buy housing because the interest rates are too high.

Trump spent a great deal of his second term trying to pressure the Federal Reserve to lower interest rates.

So far, as of October, the Federal Reserve has been hesitant, only cutting rates once this year.

Trump has responded by threatening to fire the chair, Jerome Powell, and by trying to fire one of the board members, Lisa Cook.

He's run into legal trouble on both counts, but will be able to replace Powell early next year anyway, as his term as chair expires in May.

The president says he will specifically pick a replacement who will cut interest rates.

If I think somebody's going to keep the rates where they are or whatever, I'm not going to put them in.

I'm going to put somebody that wants to cut rates.

There are a lot of them out there.

So, how should you feel about this?

Maybe you think it's good.

Maybe you think the Fed does need to be dragged into line.

Admittedly, the work of the Fed over the last 30 years, strong stock market and GDP growth at the expense of, you know, the housing market and inequality has clearly left a lot of Americans behind.

Even a small dose of inflation was enough to put millions of people on the edge of poverty.

Trump's campaign promise to reduce the cost of living and bring down the price of groceries was a major part of how he won the election.

So the people who voted for Trump should probably be wary of what might happen if he tinkers with the organization specifically designed to keep inflation down.

This episode of If You're Listening was written by Adair Shepard and me, Matt Bevan.

Supervising producer is Cara Jensen-McKinnon.

Audio production is by Adair Shepard.

Now, usually I'd talk a bit about what we're doing next, but I think it's best for everyone if I just stop talking.

It's probably going to be about Gaza, though.

I'll catch you next week.