JUANA SUMMERS, HOST:
On Sunday, Federal Reserve Chairman Jerome Powell announced that the central bank was served grand jury subpoenas over testimony he gave to Congress about the growing cost of building renovations.
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JEROME POWELL: 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.
SUMMERS: President Trump has not been shy about wanting to have more influence over the Fed. He's called Powell a political hack and a stubborn mule and repeatedly tried to get the central bank to drastically cut interest rates. Now some members of Congress, including some Republicans, say they're concerned the independence of the Federal Reserve is now at risk. Adam Posen is president of the Peterson Institute for International Economics. He's studied central bank independence for a very long time and is here now to explain what this all might mean for the future of the Federal Reserve. Welcome to the program.
ADAM POSEN: Thank you for having me, Juana.
SUMMERS: Adam, let's start with this. What was your first reaction when you heard that Jerome Powell and the Fed had received these subpoenas?
POSEN: That the president or the administration is trying to intimidate a hardworking bureaucrat just trying to do the right thing. And as the chair accurately said, it's a power gambit by the president and his team to force the Fed to set interest rates and set monetary policy in ways contrary to their judgment of what's best.
SUMMERS: I'll note that President Trump has said that he had no knowledge of the investigation. But to your mind, do these DOJ subpoenas endanger the independence of the Federal Reserve?
POSEN: I think they do. Specifically with respect to the Fed and independence, there is this tendency to have it as this abstract thing. Independence isn't abstract here. Independence, in this case, is what we call operational independence. So it's like you have an airline pilot or a surgeon. You don't want the patient or their family or the passenger on the plane telling them how to run the plane or do the operation while they're doing it. You want them to be accountable. You want to say, you get me from here to there, you take out my damaged appendix. And you want there (ph) to be accountable if they mess up after the fact. You can sue for malpractice. You can do whatever. Or you can just simply complain. But you don't get involved in the technical nitty-gritty of trying to make things work because it backfires.
When an elected executive tries to put pressure on the head of a central bank, you end up with higher inflation 'cause they get them printing money at times when it's not justified, for purposes to pay off things the elected official wants. This kind of political propositioning then leads people to expect inflation and that becomes self-fulfilling, and you create a situation where people expect inflation and you just get more inflation, which is bad for the country.
SUMMERS: Now, we know that it has long been the practice of the Fed to avoid overt fights with the president or Congress, but watching Jerome Powell's statement after receiving that subpoena, that is just a remarkably different tack. Why do you think such a change?
POSEN: I think Chair Powell finally realized that he had to draw a line and he had to make an appeal that would lead to Congress getting involved and realizing what's at stake. And he had to make an appeal so that the public and markets would see that this was at least as unprecedented for the president to do something like this. It may be that they did cost overruns on the new building renovation at the Fed. But anyway, even if they did, that's something that Congress reviews and isn't criminal and wasn't anybody's fraud and wasn't to the personal gain of Chair Powell. I think he felt he didn't have a choice at this point.
The Fed has always been much more answerable to Congress than the president 'cause Congress has the committees - the banking committee in the Senate, the finance committee in the House - that oversee, according to the Federal Reserve Act, how well the Fed is doing - do they have the right priorities? - and setting the priorities for the Fed. It was also, as so many things are these days, about calling on Congress to step up and exercise its constitutional role. I think that's part of why Chair Powell finally broke and felt he had to speak bluntly.
SUMMERS: And Powell only has months left in his term as Fed chair. President Trump will get to nominate his own replacement. And we've already seen at least one Republican on the Senate banking committee, Thom Tillis of North Carolina, say that he would vote to block Trump's nominee unless the DOJ investigation is resolved. Adam, what would a prolonged fight over Powell's replacement mean for the Federal Reserve, day in and day out?
POSEN: There are two jobs that Chair Powell actually has. He is the chair of the board of governors and he's the chair of the Federal Open Market Committee. The reason this matters is, first, Chair Powell's term as a governor goes on for several more years. He can stay on the committee if he decides he needs to, and in which case, it is possible that the committee votes to make him chair, even if he's no longer chair of the board of governors. The second thing is, if Chair Powell were not to continue on the committee as a governor, then President Trump would very quickly have a majority of his appointees on the board of governors, but he still wouldn't have a majority in the FOMC. The ultimate effect, though, is paralysis because there would be very split votes and no clear direction.
SUMMERS: Big picture, as you take stock of the future of the Federal Reserve at this moment in time, does it look any different to you right now?
POSEN: I think it does. I think, like a lot of things that have gone on in the economic sphere and other spheres under the Trump administration this term, you're making pretty irreversible changes to how much people can trust in the power of institutions. The Fed has even legally had a special status with respect to monetary policy to be more technocratic, to be more independent, going back to that word. The Supreme Court has affirmed that, although they're narrowing it over time. I mentioned earlier, Juana, the idea that expectations matter because it's not just what the Fed decides, it's what people think they'll decide when inflation comes. And so I think this will ultimately result in the Fed getting more rational no matter who Trump appoints after the next inflation, but that the inflation will stay higher and stay around longer because people will expect less from the future Fed, and that will be a cost that we'll all pay for an ongoing period.
SUMMERS: Adam Posen is president of the Peterson Institute for International Economics. Thanks so much.
POSEN: Thank you. Transcript provided by NPR, Copyright NPR.
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