--:-- Ryan Knutson: The Federal Reserve, the country's central bank, is facing a difficult choice right now. Does it keep interest rates high to battle stubborn inflation? Or does it lower interest rates in hopes of boosting a sluggish job market?
--:-- [Sound of a soccer match]
--:-- Ryan Knutson: I always think of a soccer match where somebody's taking a penalty kick and the Fed is the goalie here. They have to decide, are they going to dive to the left and address the risk of a weakening job market? Or are they going to dive to the right and address the risk of higher, longer, more persistent inflation?
--:-- [Sound of a soccer match continues]
--:-- Ryan Knutson: Tomorrow, Fed Chairman Jerome Powell will announce which way the Fed is going, whether it will cut interest rates, and if so, by how much, or whether it will hold them steady.
--:-- Nick Timiraos: But the factors at play aren't only economic. The Fed's meeting this week comes after months of efforts by President Trump to reshape the Fed in his image. It's taking place against a truly wild backdrop where the attendees at the meeting, you have one Fed governor that President Trump has tried to remove. You have a Trump advisor who is being hustled into the committee room by the Republicans in the Senate.
--:-- Ryan Knutson: So it's gone way beyond just Donald Trump yelling at Jay Powell towards the Trump administration actively trying to get into the building so that they can execute more influence on monetary policy.
--:-- Ryan Knutson: Welcome to The Journal, our show about money, business, and power. I'm Ryan Knutson. It's Tuesday, September 16th.
--:-- Leanne: Imagine being 12 years old, already having 30 bone fractures, and wondering, why can't I just play like other kids? I'm Leanne, and I was diagnosed with brittle bone disease. Now, I'm running the Bank of America Chicago Marathon for Lurie Children's, so every kid can just be a kid.
--:-- [Sound of a commercial]
--:-- Ryan Knutson: What would you like the power to do? Bank of America.
--:-- Nick Timiraos: So the way I think about it is the Trump administration is executing a number of policy experiments on the economy simultaneously. And let's go through those. First, deportations and reduced immigration that is reducing the potential pool of workers in the economy. Second, obviously tariffs. They drive up costs for businesses.
--:-- Ryan Knutson: So all year long, the question has been, how will this story play out? If inflation goes up and the job market weakens, which one happens first? Which one does the Fed react to more?
--:-- Nick Timiraos: The Fed can't reduce inflation and boost the job market at the same time. It has to pick one. That's because the way to keep inflation in check is to slow down the economy with higher interest rates. But the way to boost the labor market is to do the opposite and stimulate the economy by lowering interest rates.
--:-- Ryan Knutson: So for the Fed, it's a catch-22, because doing one can hurt the other.
--:-- Ryan Knutson: Okay, let's talk about where things stand with the job market. I feel like I've been seeing a lot more headlines lately of companies talking about how they're not laying off workers, but they're pumping the brakes on projects, and they're not really hiring new workers.
--:-- Nick Timiraos: What we've seen for the last two years and what we continue to see is a slow slow economy. And the worry is well what happens if that breaks in favor of firing.
--:-- Ryan Knutson: Now to your question, we haven't really seen meaningful evidence of an increase in layoffs. But in the first week of September, there were more people who applied for jobless benefits.
--:-- Nick Timiraos: And if you were to see jobless claims continue to rise, that would be alarming because it would tell you that maybe we are moving out of this no hire, no fire labor market towards one where businesses are letting go of workers.
--:-- Ryan Knutson: There was also a jobs report that came out recently that was weaker than people expected. Right. The payroll growth has slowed down a lot beginning in May.
--:-- Nick Timiraos: So maybe it's a coincidence that it happened right after these big, broad tariff increases. But it also would support what you'd been hearing from businesses, which is we're just not going to do anything until we can see what our cost of goods are going to be, when we can see what the tariff schedule is going to be from the places where we source our goods or materials.
--:-- Ryan Knutson: So on the one hand, the labor market is weakening, meaning the Fed might want to dive left and lower interest rates. But on the other hand, there's also a good reason to dive right and combat inflation.
--:-- Nick Timiraos: The Fed's goal is to keep inflation around 2%. But recently, inflation started ticking up again and is now closer to 3%.
--:-- Ryan Knutson: The 3% inflation rate that we see right now, it's definitely moved in the wrong direction from where it looked like it was going to go a year ago.
--:-- Nick Timiraos: But the much feared surge in prices that you thought maybe you were going to get after the Trump tariffs took effect, we haven't seen that. Businesses are more reluctant to pass along these price increases.
--:-- Ryan Knutson: So there are different schools of thought. Some economists say we're just going to see it later. Some economists are saying, you know what, if we haven't seen it by now, it means that the economy just cannot support the higher prices that businesses would like to charge because demand isn't there.
--:-- Nick Timiraos: They're going to take it in their margins. Profits will be reduced.
--:-- Ryan Knutson: So the inflation picture is a little bit more mixed.
--:-- Nick Timiraos: Is there any kind of consensus among economists about what the Fed should do?
--:-- Ryan Knutson: There's division over what the Fed should do, both outside the Fed boardroom and inside the Fed boardroom.
--:-- Nick Timiraos: There are some people who say, look, inflation has been above your target for four going on five years now. The longer that happens, the more people will just expect inflation to be high.
--:-- Ryan Knutson: And so there are some people who say, you just can't take another risk on inflation after what we went through.
--:-- Nick Timiraos: There are other people who say, well, hold on. If the labor market's cooling and maybe weakening, then you should cut interest rates and you should focus on the labor market and you should treat the price increases from tariffs as something that won't be repeated.
--:-- Ryan Knutson: What are the risks if the Fed gets this wrong?
--:-- Nick Timiraos: Well, there are risks on both sides, right? If they get it wrong because they cut too much and they stimulate demand and businesses are able to discover they can pass along more of these cost increases, then one risk would be we just have a 3% inflation rate going forward in this country that is higher than what we were used to before the pandemic.
--:-- Ryan Knutson: The risk on the other side is that you worry too much about inflation. You have PTSD from 2021 and 2022, and that was a very serious inflation problem. But the risk would be you're so focused on the potential inflationary impacts at tariffs that you ignore the ways that tariffs actually destroy demand.
--:-- Nick Timiraos: And even if the Fed cuts, you're not going to be able to stop that process of workers being fired, demand being reduced in the economy so fewer people have jobs. That, you know, that recessionary cycle takes hold.
--:-- Ryan Knutson: But the economy isn't the only factor weighing on the Fed right now. There's also pressure from the president.
--:-- Ryan Knutson: That's next.
--:-- Ryan Knutson: [Sound of a commercial]
--:-- Ryan Knutson: What does President Trump want from the Fed and why?
--:-- Nick Timiraos: Well, President Trump has made no secret he wants the Fed to cut interest rates. He has a view that there isn't going to be a real inflation problem, but we do have a budget deficit problem.
--:-- Ryan Knutson: So what Donald Trump wants is lower borrowing costs for the federal government.
--:-- Nick Timiraos: And very importantly, we have to get interest rates lowered in our country. Our country is the hottest in the world right now.
--:-- Ryan Knutson: Yeah, and politicians have always preferred lower interest rates, right, because it stimulates the economy, makes it easier and cheaper to get mortgages and take out loans and voters like that.
--:-- Nick Timiraos: There's a bias always to having lower rates. The political establishment is always going to want to have stronger growth today, lower rates today.
--:-- Ryan Knutson: I had lunch with Alan Greenspan several years ago, and we were talking about this, and he was the Fed chair for 19 years.
--:-- Nick Timiraos: And he said in all of those years, do you know how many times somebody asked me to raise rates and how many times somebody asked me to lower rates? It was always in favor of lowering rates, and that implies a very significant bias in favor of more accommodative monetary policy.
--:-- Ryan Knutson: But the Fed isn't supposed to care about what politicians think. And it's not supposed to care about the budget deficit.
--:-- Nick Timiraos: There was an agreement in 1951 between the Treasury Department and the Fed, which is what scholars refer to this as the Fed's independence.
--:-- Ryan Knutson: But it basically said we're not going to take that into account when we set interest rates.
--:-- Nick Timiraos: The Fed has focused more on economic conditions. Keeping inflation low, having a strong economy is seen as something that will ultimately be in the long-run interest of the U.S. government.
--:-- Ryan Knutson: Since the start of his second term, Trump has been trying to get more of his appointees onto the Fed's board of governors to influence policy.
--:-- Nick Timiraos: The Federal Reserve has seven governors on its board, all of whom sit on the 12-person Fed committee that sets interest rates.
--:-- Ryan Knutson: Trump appointed two of those governors during his first term. And recently, he got an opportunity to appoint one more.
--:-- Nick Timiraos: So right after the Fed's last meeting, one of the Biden-appointed Fed governors, Adriana Kugler, unexpectedly resigned.
--:-- Ryan Knutson: Her term was up in about six months, but she left early. She hasn't said why.
--:-- Nick Timiraos: And the Trump administration immediately turned to Stephen Myron, who is the chair of the Council of Economic Advisors.
--:-- Ryan Knutson: Myron was confirmed by the Senate yesterday to serve out the remainder of Kugler's term, which ends next year.
--:-- Nick Timiraos: Myron's confirmation process is one of the fastest in the last 25 years. He's been confirmed in a matter of two weeks.
--:-- Ryan Knutson: And that was all done to make sure he would be at this Fed meeting where he could vote and begin to try to influence the policy conversations.
--:-- Nick Timiraos: But even though Myron is now serving on the Fed's board, he's not planning to quit his job at the White House.
--:-- Ryan Knutson: So Myron has come up with an unusual arrangement. We haven't seen this in the modern history of the Fed, where he would actually leave but not resign from the White House.
--:-- Nick Timiraos: So he would sort of be inactive or on leave from the Council of Economic Advisors for the duration of this stub term that he has at the Fed.
--:-- Ryan Knutson: Because his term will expire in January. And at that point, maybe he gets nominated to a new 14-year term or maybe he goes back to the White House.
--:-- Nick Timiraos: This seems very unusual. It's very unusual.
--:-- Ryan Knutson: There are some Republicans who've worked for other presidents who have said that this is completely inappropriate, that you shouldn't have executive branch officials going into the Fed and then right back to the White House.
--:-- Nick Timiraos: How could anybody think that you going to be an independent voice when you have a job for the president waiting for you when this is all done?
--:-- Ryan Knutson: So it undermines the appearance that anybody would act completely independently in that job.
--:-- Nick Timiraos: Myron told senators at his confirmation hearing that he would act independently.
--:-- Ryan Knutson: And in fact, Myron wrote a paper in 2024 where he said, where he sort of decried what he saw as a revolving door between the executive branch and the Fed.
--:-- Nick Timiraos: And he and his co-author proposed a four-year ban on Fed officials serving in executive branch jobs after leaving the Fed.
--:-- Ryan Knutson: So is there a potential that the president would have leverage over him because Myron is still technically an employee of the executive branch?
--:-- Nick Timiraos: It raises all sorts of unusual questions. For example, is there going to be somebody now in the Fed meetings who is able to report back to the Treasury Secretary or the White House about who said what at this meeting?
--:-- Ryan Knutson: And those meetings are normally like a closed door?
--:-- Nick Timiraos: Well, you know, yeah, they're supposed to be confidential. The deliberations are confidential. The transcripts to those meetings come out five years after the fact.
--:-- Ryan Knutson: And it's always possible that this has happened in the past, that other people have sort of disclosed, well, here's where the pressure points are on the committee.
--:-- Nick Timiraos: But I've talked to a number of analysts in the last week who think this is just an even more ripe scenario now because he is still technically an employee of the executive branch.
--:-- Ryan Knutson: The other thing Trump has done is try to fire another Fed governor named Lisa Cook.
--:-- Nick Timiraos: She's been accused of filing fraudulent information on a mortgage application. Her lawyers say she hasn't committed fraud, and she's sued, challenging her firing.
--:-- Ryan Knutson: Late Monday night, just hours before the beginning of the Fed meeting, an appeals court rejected Trump's request.
--:-- Ryan Knutson: How big of an influence do President Trump's appointees have over the final decision on whether or not the Fed raises or lowers interest rates?
--:-- Nick Timiraos: I mean, there are 12 people on this committee, and they each just get one vote.
--:-- Ryan Knutson: That's a great question, because the truth is that one or two people are not going to change the decision here.
--:-- Nick Timiraos: So, you know, the issue is more over the long run what happens here if you change sort of the basic protocols and norms that have governed the central bank for the last 30 or 40 years.
--:-- Ryan Knutson: But for this particular meeting, what seems possible is that the Fed cuts interest rates by a quarter point, but two or maybe three Trump-appointed Fed governors dissent in favor of a larger cut.
--:-- Nick Timiraos: Now, normally, when you have three dissents, that's a big deal.
--:-- Ryan Knutson: Nick says that in the past, if three governors dissented to a vote, it would be a sign that the Fed chair is losing support from the rate-setting committee.
--:-- Nick Timiraos: But in this case, it's more likely a sign that these governors are simply auditioning to replace Powell when his term ends next year.
--:-- Ryan Knutson: You know, one analyst said to me, it's almost as if you have to staple your dissent to your job application if you want to have that job application considered by the Treasury Secretary and the president.
--:-- Nick Timiraos: What I'm saying is that this week will be more unusual than most, and that the dissents that you see, if you see any this week, may have other factors beyond the Fed chairs losing control of the interest rate setting committee.
--:-- Ryan Knutson: So how big of a moment is this for the Federal Reserve right now?
--:-- Nick Timiraos: It's very possible we will look back at September 2025 and say, yep, that was the point at which the Fed began to behave in a different way, that the institutional norms that had protected the autonomy for the central bank to have some distance from the political process, that that began to erode.
--:-- Ryan Knutson: It's entirely possible you will look back at this time and say, that was how it happened.
--:-- Ryan Knutson: That's all for today. Tuesday, September 16th. The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Ryan Knutson: If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon.
--:-- Ryan Knutson: Thanks for listening. See you tomorrow.
