Trump's Attacks On Federal Reserve's Powell Could Bring Economic Pain

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Hey there, it's the NPR Politics Podcast.

I'm Sarah McCammon.

I cover politics.

I'm Mara Lyasson, Senior National Political Correspondent.

We also have NPR Finance Correspondent Maria Aspen joining us.

Hi, Maria.

Hey there.

Today on the show, what is President Trump's beef with Fed Chair Jerome Powell?

Trump has been relentless in his attacks on Fed Chair Powell.

On Tuesday, he called him a numbskull.

Maria, let's remember, Trump, he nominated Powell during his first term in office, right?

Why is he so angry with him now?

Well, he nominated him and then he started, you know, attacking and harassing him.

So this has been going on for a while, but Trump's attacks on Powell have really ramped up and intensified recently.

And it all comes back to Trump wants the Fed to lower interest rates, and the Fed isn't lowering them, certainly not fast enough for him.

Trump wants this because lower interest rates mean that the U.S.

government pays less interest on its massive debt, and it also means that consumers and businesses pay less for loans.

But the Fed generally is concerned about fighting inflation, and raising or keeping interest rates high are the key tool it has to fight inflation.

This is all really important at a time when President Trump's new tariffs are also increasing costs for consumers, and we saw inflation tick up last month.

So all of this is happening.

There's a Fed meeting next week and the Fed is widely expected to hold interest rates steady, which is probably not going to make Trump very happy.

Do these attacks seem to be affecting Powell or the Fed's decisions?

Not so far.

And Powell has tried to just stay very heads down, as far out of the political fray as possible, which obviously is getting harder and harder.

But it's also important to note that as much as Powell has become the target of Trump's ire, he does not unilaterally set interest rates.

How does it work?

How does the Fed actually set these interest rates?

So it's not just Jerome Powell.

It is a group of 12 people known as the Federal Open Market Committee, of whom Powell is one and the chair.

Now, the Federal Reserve is an independent agency.

And we should say President Trump has said that Powell will serve out the rest of his term.

But does Trump have the power to fire Powell?

Legally, he's really only allowed to fire the Fed chair for cause.

What's making a lot of people alarmed is that the White House seems to be ramping up its efforts to find such a cause, and it's specifically focusing on the ongoing renovations to the Fed's headquarters, which is nearly a century old.

Mara, as I've said, this is an independent agency.

What do you make of Trump's attacks on Powell?

Donald Trump wants to finance the huge debt of the United States.

His bill just added about $3.3 trillion to it.

He wants to finance it with obviously lower interest rates.

And because of that goal, he's violating the norm of letting the Federal Reserve be independent.

And I think that other presidents have done this in the past.

Usually it hasn't worked out very well.

When you bully the Fed or put political pressure on the Fed, investors who buy our debt and finance it and set the interest rate on it think that the American economy is not very strong.

And they end up charging more for financing our debt, for lending us money, in effect.

That's why he's doing it.

What's really interesting to me is how

transparent Donald Trump has been about trying to find a reason other than a political difference or an economic difference of opinion with Powell.

He said the other day when he was asked, would you fire Powell, he said, I don't rule out anything, but I think it's highly unlikely unless he has to leave for fraud.

And that's what the discussions about the cost overruns at the Federal Reserve building renovation are about.

Yeah, Maria, why is that significant?

Again, there is supposed to be this separation between the President and the Fed that Trump seems to be blithely disregarding.

And as Mara noted,

the sort of issue that Trump has fixated on and that he and his advisors have really made a lot of noise about are these renovations.

The Fed's headquarters are like 100 years old.

The renovations are now costing about $2.5 billion, which is hundreds of millions of dollars over budget.

And so Trump and his advisors are using this as sort of as a potential pretext to say, ooh, this seems like potentially fraud.

And Maria, what is the Fed saying about why those renovations are over budget?

I mean, basically, it says that it started the renovations and found unexpected things like asbestos and excess lead.

And it also says that inflation has raised the cost of building projects like its own renovations.

As somebody who owns an old house, I can kind of relate to that.

I think that we're in a very weird time for markets right now, but markets and businesses and business leaders, including CEOs of some of the country's largest banks, are standing up for Fed independence, are defending Powell or expressing their hopes that the president does not fire or force out Powell if Trump does in fact do so.

I do think we'll see markets, investors, and business leaders very concerned.

And obviously there are a lot of factors in play that affect the markets, but what can be said, Maria, about how the markets are reacting to Trump's attacks on the Fed and Chairman Powell?

It's hard to tell at the moment, just because there is so much else going on, including these ongoing sort of tariff steals announcements.

But the markets are generally doing really well.

The SP 500 has been hitting record highs.

We're also seeing big companies reporting a lot of earnings last week and this week, which is playing into how investors feel about the economy.

So it's hard to say how much the Powell conversation is specifically affecting markets, but markets in general seem pretty optimistic these days.

You know, this is something that CEOs of major banks have been talking about, stressing the importance of the independence of the Federal Reserve.

Mara, how much political influence do those bank CEOs have?

I don't think the bank CEOs have a lot of political influence, but what I do think is kind of the last guardrail for President Trump are markets.

He cannot intimidate markets.

He can't pressure them.

I don't think that if J.P.

Morgan Chase head, Jamie Dimon, gives a speech somewhere and says something about the independence of the Fed, President Trump really doesn't care about that.

But we have seen him back off of tariffs and other economic policies when the bond markets reacted badly, or maybe if the stock market took a dive.

The markets do seem to affect him.

They do.

They're in a really weird moment where

we've seen like the SP 500, for example, hitting record highs, even as we've seen large companies like General Motors come out and say that tariffs are costing it billion dollars.

You know, this sort of markets period has been known as the taco trade.

That's an acronym coined by a Financial Times columnist.

Trump always chickens out, is what it stands for.

And the idea is that markets now think, especially after some of the terrorist back and forth that we've seen for the past several months, markets now don't think Trump is serious about some of the most extreme things that he suggests or floats.

The problem becomes that if markets don't react to some of the more extreme suggestions, Trump doesn't necessarily have that check on his more extreme suggestions that Mara alluded to.

All right, it's time for a quick break.

We'll have more in just a moment.

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And we're back.

Now, there was some more big tariff news this week.

Maria, what did we learn?

So as of the taping of this podcast, there is progress, but trade deals do continue to be in flux.

So we saw the White House announce tariff deals with Japan and Indonesia and the Philippines and there are reports that a deal with the European Union is forthcoming.

But then of course there are still a lot of countries left and next week we have the latest White House imposed August 1st deadline for tariffs deals

and there's not a lot of clarity just about how much clarity we will have by next Friday.

And it is corporate earnings season.

And as optimistic as the markets are, we have seen some big companies, especially the big car makers, talk about how tariffs are really affecting their businesses, costing them a billion dollars each or more.

Maria, is there a trend here?

Are the tariffs that he's ending up with much lower than the ones he threatened?

Seemingly, yes.

For example, with Japan,

there was the initial tariff was 25%, and the deal announced this week was 15%, which of course came as a relief, although again, that's still higher than the taxes we would pay on any sort of Japanese goods, say, six months ago.

Yeah, and on that note, according to the Yale Budget Lab, tariffs are at their highest point in this country in roughly a century.

I mean, that's a pretty significant data point.

It feels like time for a check-in on how those tariffs are shaping the broader economy.

Maria, many of us, if we've been to the grocery store, the drugstore, would say, yes, we are feeling the effects.

I couldn't believe what I paid for shampoo the other day.

But I mean, what does the data say?

Are we feeling the effects yet in terms of prices?

So as of last week, the data says yes, we are starting to see inflation heat up.

That said, economists that I talked to also say a lot of companies are still figuring out A, what the actual final tariffs will be, and then B, how much they're going to pass them along to consumers.

So it's probably going to be

several weeks to months more before we get a really full picture of what the impact is going to be on consumers and on the economy writ large.

You know, Mara and Maria, you both were talking earlier about the fact that markets don't always take Trump seriously.

This idea of tariffs coming has kind of gotten built into the market sensibility in a way.

I mean, do we have any sense of when or if that might change as these tariffs continue to show up in real prices people are paying?

Well, that's the key word, real prices.

I mean, there's the stock market and then there's the real world.

I think if tariffs do cause inflation, they're a tax on imports that consumers pay,

then I think they start affecting things.

Right now, companies seem to be, as Scott Besson said, the Treasury Secretary, eating the tariffs.

In other words, they're not passing on all the tariffs to their consumers, but that might change.

Yeah, and we're also seeing some companies, like service providers like Delta Airlines, for example,

after

sort of walking back on some of the more dire warnings they had about the economy earlier this year.

So as long as big companies are not fully sounding the alarm yet, I think markets are going to continue to be relatively optimistic on a day-to-day basis.

Aaron Powell, you know, Mara, we were talking earlier about Trump's tendency to violate political norms.

We were talking about the independence of the Fed, for example.

Trump's base likes that about him.

They like it that he breaks political norms.

But is there an economic risk when he's doing something like messing with the Fed or economic policy?

Aaron Ross Powell, yes.

I think politically there's very little risk.

As you said, this is what his base would like.

The economic risk is high because markets are not something that he can pressure or bully.

They are going to react to the idea that the Federal Reserve no longer acts in its best evaluation of what's the right thing to do to keep unemployment low.

They're going to think that the Fed is politically controlled, and then maybe the United States is not the kind of predictable market that is governed by rule of law that they thought.

And they're going to either demand higher interest to finance America's debt, or they're not going to invest.

This is what's happened where international investors concluded that the central bank was politically controlled.

So, the independence of the central bank is not something that is a nicety, it's something that's important if you're going to be the leading economy in the world with the world's reserve currency, like the United States has been.

That is just so important.

America has this economic and financial supremacy in the world that

is at risk of being squandered and is very hard to get back once it would be squandered.

Aaron Powell, which also raises the question, if there's an economic hit from these decisions, from Trump's actions, at what point does that turn into a political risk for him?

If not immediately, does it become a political risk at some point?

Aaron Powell, sure.

You mean if the economy tanks or if inflation is sky high, then it becomes a political risk for him.

Absolutely.

I mean, the stock market isn't going to punish him, but ordinary voters might if his tariffs and his bullying of the Federal Reserve end up with high inflation.

And Maria, beyond the politics, what else are you watching for as this story continues?

I think what's really important is to keep an eye on the long-term effects.

Because again, as we've discussed, the markets data is on a day-to-day basis.

The economic impacts are going to take a really long time to be fully felt.

And so I think it's going to be hard to wait to get a full picture.

But we're certainly going to be continuing to cover both the day-to-day fallout but also the bigger economic and financial picture for this country.

We're going to leave it there.

Thank you for joining us, Maria.

Thank you so much.

I'm Sarah McCammon, I cover politics.

And I'm Mara Lyason, Senior National Political Correspondent.

And thank you for listening to the NPR Politics Podcast.

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