Chicago Booth Review Podcast Trumponomics: Will the White House Wage War on the Fed?

Randall S. Kroszner: And I also think that there might be a few Republicans who would be very wary of touching the Federal Reserve Act. There would be some who would love to do it, but I think there would be a number who would be quite wary of doing that because that could have very big impacts on inflation expectations, for example.

And if you suddenly started seeing more discussion about, "Well, we got to reign in the Fed, we've got to bring that closer in and control it," I'm not so sure that the markets trust the politicians more than they trust the Fed.

Hal Weitzman: President Trump has accused the Federal Reserve of causing and failing to stop inflation. "The US Central Bank and its Chairman, Jay Powell," he says, "Spent too much time worrying about diversity, equity, and inclusion, gender ideology, green energy and climate change, and too little trying to combat rising prices."

Instead, Trump says he will take care of inflation by producing more energy and boosting US manufacturing. Will the next four years see a confrontation between the Fed and the White House? Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman. Today, we're continuing our Trumponomics series, in which we give you the Chicago Booth Review perspective on the White House's economic policies.

Chicago Booth's Randy Kroszner is a former member of both the President's Council of Economic Advisers and the Board of the Federal Reserve. Does he think the Fed and the White House are on a collision course? Will the administration really be able to bring down inflation on its own, and how is the Fed likely to respond? Randy Kroszner, welcome back to the Chicago Booth Review Podcast.

Randall S. Kroszner: I'm delighted to be back.

Hal Weitzman: Now listen, your expertise is in the Fed, obviously, so we wanted to have you back to talk about the White House and the Fed. Could there... Is there a confrontation? [inaudible 00:02:02] just in general, are you concerned about a confrontation there?

Randall S. Kroszner: So, certainly, the president has talked about it. He talked about it when he was president last time. He had appointed Jay Powell and then was disappointed with Jay Powell's performance, and said a lot of very negative things. Talked about potentially removing him. I don't think that the president can do that. Again, that talk has come up.

I think Jay Powell has made it pretty clear in his answers in the press conference a couple of Fed meetings ago when asked is he going to leave? His answer was no. And, "What if you're pressured to leave? No. What if you get pressure from the White House? That's not how we operate." And so I think there will be a lot of discussions about that, but I don't think there'll be any formal action.

Hal Weitzman: Okay. But I mean, I guess the reason that we wanted to talk to you is because a lot of the Trump policies so far appear to be contradictory. Now you say you want lower inflation, but you use tariffs. You talk about tax cuts. You have the immigration rates, all of which push up inflation. You want lower inflation. You want lower interest rates. Usually, you can't have both of those.

You want a weaker dollar, but you use tariffs. You can't have both of those. So these are all things that lead to perhaps an attempt to kind of find a scapegoat when things don't go wrong. And we talked last time we were on the pod about how you have lots of different things you want to do. Realistically, not all of them are going to happen.

So you'll probably point to the wins. But then, when you're asked about the ones that you didn't achieve, perhaps you can point to the Fed, the other big actor that has big control over the US economy, and say, "It's their fault because interest rates are too high" or whatever.

So how do you think this will play out over the whole four years with the interest rates sort of being the battle? And we can look out a certain amount of time. No further. But generally, what do you think will be... how do you think that tension will play out? And this attempt to sort of blame the Fed, do you expect that to happen, and how do you think the Fed will respond, et cetera?

Randall S. Kroszner: Well, the Fed is always the whipping post.

Hal Weitzman: Right.

Randall S. Kroszner: In some sense, it was created to be that. And certainly, I know that wealth, having been there during the global financial crisis because I think-

Hal Weitzman: Right. As you... I've heard you say many times you caused it.

Randall S. Kroszner: No, no, no, no. I said we may have contributed to it, but [inaudible 00:04:26]-

Hal Weitzman: Right.

Randall S. Kroszner: ... a lot of blame to share.

Hal Weitzman: It's all your fault, I think is the way you put it.

Randall S. Kroszner: Yeah. Well, I'm not so sure. There were some things for sure, but not everything. But that's a nice example. It's a very nice illustration of like, well, Congress, of course, didn't say it had anything to do with trying to promote affordable housing and issues that led to people may be taking on too many burdens for housing. It was the Fed's fault. It wasn't Congress's fault. And so you'll see exactly that same sort of thing.

So central banks are used to having elephant-thick skin. If you don't have elephant-thick skin, you should not be going to a central bank because people are never going to give you credit for when things are going well. That's the brilliance of the private sector or other legislative initiatives. And things go wrong, it's your fault. "Why didn't you see the crisis coming? Why didn't you see this?

Why didn't you see that?" So I don't think that is... especially if the economy turns down, that'll be the standard trope. I think if the economy stays reasonably strong so that labor market is still reasonably strong, certainly, you'll hear complaints and such, but I don't think it'll be as much of a focus. So if the dollar stays reasonably strong but our manufacturing sector isn't going off the cliff, then, again, I don't think it'll be the main whipping post.

But if the economy turns south, then I think, yeah, it's an obvious place to turn. "The Fed got it wrong. Should have cut interest rates much sooner. See, I told you so. They got it wrong. Jay Powell doesn't know what he's doing." And then that'll be the narrative that will develop, and people will cut into that narrative.

Hal Weitzman: Yeah. And I mean that isn't necessarily new. People have been saying that, for a while, right-

Randall S. Kroszner: Yeah.

Hal Weitzman: ... that the Fed didn't read the inflation trends correctly.

Randall S. Kroszner: Right. I mean, I think clearly the Fed, as well as every other central bank around the world, didn't get it right. They kept talking about transitory, transitory, transitory, which is fine for three months, six months, but after about six months, it gets a little tiring to hear the same thing when inflation keeps going up.

And eventually, they got religion and then started reducing the size of their balance sheet, stopped buying as many assets, and started to raise rates too late. But everybody was too late on that. The Fed was not an outlier on that.

And I think the Fed, as well the other central banks, get credit for bringing down an inflation, at least for the US at a 40-year high and bringing it down unlike 40 years ago when Paul Volcker was in and having a tremendous recession of really having a very soft landing, at least so far.

Hal Weitzman: Administration has talked about its own plans to reduce inflation, which include drill, baby, drill, you know, improve... increasing the amount of fossil fuels that we're producing and presumably using. Is that really a way to reduce inflation? Is that going to have a real effect?

Randall S. Kroszner: I think there are two aspects to inflation. One is the amount that we calculate or the number that we calculate. And the other is the perception of inflation.

Hal Weitzman: Sure.

Randall S. Kroszner: And the perception of inflation is important not only politically but also in our economic models. They're all about inflation expectations. And one of the key things that seems to move people's inflation expectations is gasoline prices because people are driving around. It's a very salient price. You see it all the time. You're filling up your tank. And so it is a very relevant price. So in terms of both perception... well, particularly perception, but to some extent, reality, energy prices are important.

And so if the energy prices can be... can come down, that will help certainly the perception of inflation and make it easier for inflation expectations to stay well anchored. There's a question about whether the drill, baby, drill will actually have that much of an impact. I mean, can you get that much more investment in shale and other energy production so quickly?

You also would likely need cooperation from other countries around the world, particularly Saudi Arabia. At least so far we haven't heard much cooperation there. That'll again go back to part of The Art of the Deal of negotiating a whole variety of things with... in the Middle East. So it's not just drill, baby, drill, but it is something that does affect perceptions importantly.

Interestingly, usually, when you ask people what inflation is, they report numbers that are dramatically higher than the actual inflation rate, and that affects how much they're going to ask for in terms of wage increases, how much they're going to expect or tolerate in terms of other price increases. So, perception is very important when it comes to Fed policy. And as I said, that's kind of fundamental to the models that we use at University of Chicago and elsewhere to think about Fed policy.

Hal Weitzman: Yeah, I mean absolutely. When we had Michael Weber, your colleague, on the pod-

Randall S. Kroszner: Yes.

Hal Weitzman: ... talking about how people are already hoarding in anticipation of tariffs coming in. And so, according to him, we're going to have inflation regardless of whether we actually have substantial tariffs or not. And so it's all about, as you say, about expectations.

Anyone who's tried to buy a box of eggs recently knows exactly about that, which is very damaging. But to go back to energy for a second, I wanted to ask you the reason, presumably, why that may not have. I mean, we talked last time about the dollar, the strong-

Randall S. Kroszner: Yes.

Hal Weitzman: ... dollar, and how much can the US government really do about that. How much can... They may have less control over the price of oil as a global commodity. And as you say, we... the US is the big producer, but it's not the only producer. There are other very significant producers that don't have an interest in bringing down the price of oil. It's one of the most closely controlled commodities in terms of its production, and the price is very carefully-

Randall S. Kroszner: For sure.

Hal Weitzman: ... calculated and negotiated. You can't just come into that and say, "We're going to cut prices by 10%." So it's complex, right. I mean, if just producing more oil in one producer doesn't necessarily change the price.

Randall S. Kroszner: Right. I mean, it's helpful and certainly things like natural gas, although obviously that can be liquefied and sent abroad, that tends to be a little more local, and so obviously that can have an impact. Obviously, the relations with Canada and flows of energy across the border will be very important. But things like the war in the-

Hal Weitzman: Right. And here in the Midwest, we depend on Canadian-

Randall S. Kroszner: Yes.

Hal Weitzman: ... oils. We have local refinery here, not far from Chicago, where we refine Canadian oil. So if that stops flowing, our gas prices will go up.

Randall S. Kroszner: For sure, for sure. And also, then there are geopolitical issues. So, the war in the Ukraine. And if the war in the Ukraine is settled, it's likely that there'll be more energy flow from Russia that will have an important impact. I'm sure that's something that is also in the minds of the administration about how dealing with that will have an... not only an impact on the specifics of Russia-Ukraine but also on energy markets.

Obviously, I think a lot of the discussions of... and thoughts about Middle East policy are... some of them are specific to Israel-Gaza, but some of them are also I'm thinking about, "Well, what will affect incentives for Saudi to produce and more oil?" So those are the supply side things. The demand side things are, China plays a very large role in that, and it seems that the Chinese economy is struggling a bit, and so if Chinese demand is lower, the European economy seems to be struggling a bit.

If European economy... So if Europe and China demand is lower and you have some easing of geopolitical tensions that provide more supply to the market, that's probably going to be the most effective thing. It's not something like you just turn the faucet on and so you can have a lot more energy coming out of the US.

It takes time to do the investment and have the flows, and also, some of the shale boom, it's becoming more and more difficult. No surprise, you take the low-hanging fruit, you take the stuff that's really easy, and now you have to do more complex kind of drilling to to get that out, and that just takes more time.

Hal Weitzman: So this makes me think about the fact that the administration has said, and even before they took power, that their policies would not be inflationary, which many, many economists think they will be, but they're resting on some big assumptions.

For example, in tariffs, which we talked about last time you were on the pod, the assumption is there won't be any retaliation. So what are the assumptions that the White House is making when it talks about its actions not being inflationary?

Randall S. Kroszner: So it's putting a big bet on productivity growth. And so obviously if you have super increase in productivity growth from a more friendly investment climate, lower corporate taxes, less regulatory burdens, they think there'll be a big payoff from that. And so that helps to reduce price pressures.

I think they are thinking that because the US is so important... much more important to other countries' trade than other countries' trade is to the US that tough talk and tariffs and applying tariffs will not lead to trade wars. It may lead to some sort of retaliation, but that'll be much more limited.

Also, when economists talk about inflation, it's an ongoing process. It's not just a one-off. And so if you just have the cost of imported goods go up by 25%, sure, that's going to raise the price level, but that's not an ongoing inflation issue. And so it's very important to keep those things distinct.

Hal Weitzman: Just explain that for a second.

Randall S. Kroszner: Sure. So this happens with, for example, let's get back to energy. Why does the Fed often talk about core prices? So you take out food and energy. Well, you might think that's kind of crazy. If you think about a consumer basket, why would you have a consumer basket where people are not eating and people are not driving, and not keeping warm in the wintertime?

But the reason for that is those tend to be fairly volatile. They move up, and they move down, and they don't tend to have the long-term trends in them. And so, what you want to do is make policy around the long-term trends of inflation. Where is the... Where are things... What are the forces that are driving something that is going to lead to a constant increase in the price level rather than just, "Oh, there was a problem in the energy market. Energy prices went up.

Sure, measured inflation will go up, but that's just a one-time thing, and that might come back down again." So you really want to look at these underlying long-run factors. Obviously, energy is an important issue, but that's why you sometimes take these things out when you do your policy assessments. And that's true not just in the US but around the world.

Hal Weitzman: Sure, sure. But they have those things... Food and fuel have a huge impact on the psychological-

Randall S. Kroszner: For sure.

Hal Weitzman: ... understanding of inflation, right.

Randall S. Kroszner: Yeah, and that's why I always joke it's only a cold-hearted economist who could... who would take out food and energy. So keeping yourself warm and eating and think that's a consumption basket. But it's because if you look at underlying trends, there's more information content.

It's easier to predict underlying trends if you take those volatile pieces out because they move up, they move down. And so you don't want to say, "Well, that's underlying inflation. That's more a sectoral thing." As economists call it's a relative price shift rather than overall growth of... the constant growth of the price level.

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Okay, Randy Kroszner. Now, we talked in the first half about how you don't think that the president or the White House has the power just to remove the chair of the Federal Reserve, but what power do they have to put pressure on the Fed?

Randall S. Kroszner: Well, I think the main impact will be through appointments. And so I believe there's one appointment coming up between now and when Chair Powell's term is up. My hunch is...

Hal Weitzman: You mean appointments to the board.

Randall S. Kroszner: Appointment to the Federal Reserve Board, yes. And so my hunch is that the... Jay will stay in through his term, but even though he will still have a term as governor, the Fed is a very complicated animal where you have terms as governor, which are 14-year long terms as opposed to terms as or vice chair, which are four-year terms and have to be renewed by Congress... appointed by the president, renewed by Congress. I don't think the president will be very keen on reappointing Chair Powell.

I think Powell has been on the Fed for a long time. He's been chair for a while. I think he will move on. I think that's really going to be the key pivot point. Who does the president pick as the next chair? Because the chair has an outsized influence on Fed policy. Sure, everyone is a voting member, and it's majority rule, but the chair is really the one who is kind of setting the tone and setting where things are going. And so I think that's going to be the real opportunity for the White House to have an impact on Fed policy.

Hal Weitzman: Okay. And, of course, it won't just have an impact in the Trump administration. It will... That impact will continue.

Randall S. Kroszner: Yes, for sure, because the person will be chair for four years, and so it'll be in '26 that Jay's term is up and that a new chair would come in. So it'd really be in the kind of second half of the Trump administration where you would potentially see a major shift if the president chooses a very different person.

Hal Weitzman: And I mean, can the president just choose anybody they like? Does there have to be some kind of acknowledgment this person knows what they're doing and is respected among economists and that kind of thing?

Randall S. Kroszner: Like all of the appointments to, whether it's to the cabinet or to the chair of the Fed, they need send confirmation. And so, obviously, that's the key check in balance in this system. Would the majority of the senators say that this person should be chair for the chair of the Fed? And so that's really where it's going to come in.

Hal Weitzman: Now you were on the Fed on the board.

Randall S. Kroszner: Yes.

Hal Weitzman: How did you... I mean, there's always some tension, I'm guessing-

Randall S. Kroszner: Oh, yes.

Hal Weitzman: ... between central government and the Fed. So how does the Fed think about that, attempts to put pressure on it and not through appointments as you're talking about, but just through rhetoric or policies? How does the Fed react?

Randall S. Kroszner: So I think as I said before, if you're going to be a central banker, you've got to have elephant-thick skin because people are always going to blame you. You've always done something wrong. Everyone has 20/20 hindsight and know that you were a buffoon to not see this obvious thing that was coming even when nobody else saw it. So you just have to operate in that and understand that you... people will say very negative things very... and call to question your competence and such, but you just do the best that you can do.

I mean, certainly, during the global financial crisis, there were a lot of people who were raising very fundamental questions about all of us there that we didn't know what we were doing. How could we have allowed this to happen both on the monetary policy side of the potential threat for deflation as well as on the regulatory side.

And then, when we were taking actions like quantitative easing that was going to lead to hyperinflation, you must remember that many of my colleagues here at the Business School signed an open letter to Ben Bernanke saying, "Have you lost your mind? We're going to have this high inflation."

And when I came back from the Fed, they said, "Randy, we thought you were a sound money person. We're going to have this explosive inflation." I said, "I'm not so sure about that." And we had a decade where we had very low inflation rather than high inflation. So you get pressure from academics, you get pressure from policymakers.

Sometimes they're right, and sometimes they're wrong. And you just have to think, what... do we feel comfortable about we're doing? Do we think we are doing the right thing so that when the political heat is turned down and someone's writing the history, will they say, "It was reasonable. You might've made a mistake, but it was reasonable what you did."

Hal Weitzman: Okay. So they... I mean, does it have any bearing on discussions that, let's imagine, in this case, the president is attacking the Fed and saying it's keeping interest rates artificially high or whatever?

Randall S. Kroszner: I don't think certainly in the times that I was there during that tumult that was not there. You can look to the transcripts on other... because the Fed transcripts come out, the verbatim transcripts come out of the meetings, you don't really see any discussions of that. Now, that doesn't mean that it isn't on people's minds, so they know that the transcript will come out, so they may not want to say anything.

So I don't want to say that it doesn't bear on people's thinking. It won't be an explicit part of the discussion, but I think it will come into the way people may think about things and for some people more than others. But I think the biggest issue would be if you wanted to be reappointed by this president and there were issues that came in under Jimmy Carter, whether there would be a reappointment of the Central Bank governor and questions of whether he was trying to curry favor with that.

As I said, I think it's really... I think President Trump has made it really clear, and I think Powell, although not explicitly saying it, is clear he's not up for... He's going to finish his term, and that's it. And so I actually think that takes the political pressure out of him because he's going to do what he thinks is right. Because he knows no matter what he does, he's not going to be reappointed, and he doesn't want to be reappointed.

Hal Weitzman: Now, the Fed is projected that it's going to cut or expects to cut interest rates twice this year to... 25 basis point rate cuts would bring the benchmark rate to 3.75 to 4%. There's a lot of talk, though, that won't last. So, how likely do you think the Fed is to change that projection? What would make it change the projection, and what would be the implications?

Randall S. Kroszner: So the key things will be the path of inflation, path of expected inflation. And so if they start to see inflation moving up, they ain't going to be cutting rates. If they see a lot of price pressures because their forecast is that throughout the year you're going to see a reduction in inflation getting much closer to their 2% goal.

One of the things that they focused on is so-called shelter services that come into these indices and that a lot of the way that's calculated is based on rents and rents are very kind of backward-looking. You sign the rent today for the next 12 months, and so there's a lot of lagged inflation that's in that.

So they believe that almost mechanically, because inflation has been coming down and rents have been coming down, they're going to see a reduction in measured inflation. If that doesn't happen, they're going to say, "Mmm, something else is going on, and we need to understand that before we move."

So I think inflation expectations, actual inflation, and then the pieces of what's driving the... if inflation isn't coming down, that would cause them to continue to stay on pause. Now, obviously, we've talked both here and in the previous podcast, so much uncertainty about administration policy, and that will reveal itself over the next six to nine months.

Hal Weitzman: Okay. But as we sit here today, what would be your expectation about those expected rate cuts?

Randall S. Kroszner: I think that... I think we will see the one aspect of it, the so-called shelter services aspect, coming down and bringing measured inflation down. But I think the US economy was going to remain reasonably robust, and I think it really depend on some of these geopolitical issues.

Will it be more disruption of supply chains and that is both outside of the US as well as tariff policy? What's going to happen with the war in the Ukraine? What will happen with energy demand in China? Those I think are going to be some of the key factors, much more difficult to forecast.

My guess is that over time, the Fed will probably revise down the number of cuts that they're going to see. But I think if you were to ask Jay, as well as his colleagues right now, "Are you more likely to increase or cut, they say... over the next year," they would say cut. Now, it might mean that they ain't going to be cutting for a while.

Hal Weitzman: More likely need to cut, but doesn't mean they'll necessarily be doing those two-

Randall S. Kroszner: For sure.

Hal Weitzman: ... planned cuts.

Randall S. Kroszner: For sure, for sure. And they've made that really clear that there's a lot of uncertainty on policy, and that's why I think Jay very wisely got them, "Do the cuts, get to where you feel comfortable right now, and then pause for a substantial period of time."

They say that they're in a tightening mode, and I believe that they are, but not as much tightening as if they hadn't done as many cuts but not so tight that they're kind of strangling the US economy. If the labor market starts to crater, then they'll respond. If the labor market really starts to take off and wages start to grow, they ain't going to be cutting.

Hal Weitzman: Now, we talked at the beginning about a possible confrontation between the White House and the Fed. Are you concerned? This is a... There's a perennial debate, mainly, I think, on the right about the Fed and its independence and saying that abolish the Fed or whatever.

Now, you're talking about the possibility of the president appointing a friendly governor for... once that opportunity comes up. Knowing what we know about Trump, it's probably going to be someone who will be more amenable to what he wants to do. So are you concerned that this could, at least in the next couple of years, before that happens, open up or reopen this debate about Fed independence and whether that's a good idea?

Randall S. Kroszner: So I think that's definitely on the table, and I think getting back to what we were saying before, if the economy is okay, people will just throw arrows at the Fed, but the Fed has enough shields to protect those... protect itself from that. If the economy performs very poorly, inflation takes off or the... and economy really turns down, then I think they'll... that's usually when you get more of this, "Well, the Fed doesn't know what it's doing."

So either you want to put the Fed on automatic pilot and say, "It's got to follow a particular rule because its discretionary judgment is poor." Or then you get something more radical of saying, "Well, we can't trust the Fed, so we need to do something like a cryptocurrency, or we need to have a different approach to monetary policy." I don't... Since I'm not thinking that we're going to see some sort of radical change in the economy, at least over the next year or two, I think that's... we're unlikely to get a lot of support for that.

And I also think that there might be a few Republicans who would be very wary of touching the Federal Reserve Act. There would be some who would love to do it, but I think there would be a number who would be quite wary of doing that because that could have very big impacts on inflation expectations, for example. And if you suddenly started seeing more discussion about, "Well, we've got to rein in the Fed, we've got to bring that closer in and control it."

I'm not so sure that the markets trust the politicians more than they trust the Fed. They may not love the Fed, but I'm not so sure that they trust the politicians more. You'd start to see interest rates on government debt going up very significantly, and I think that would send a very clear signal to the policymakers and like, "Well, maybe we don't want to do this."

Hal Weitzman: Okay. So stabilizing force in a time that's not got a lot of stability, perhaps.

Randall S. Kroszner: Yeah. Now, of course, you could... people could say, "Well, that's not due to the discussion of Fed independence. That's due to the Fed's policy mistakes," and it would come down so you could make the opposite argument.

I think the approach that I would take, and I think most economists would take that if they saw that going up, interest rates going up, they would think that was because of concerns about Fed independence leading to much higher inflation outcomes because there would be much less trust in a much more political central bank than in a more independent central bank.

Hal Weitzman: Okay. Well, Randy Kroszner, this has been another great discussion and no doubt we'll have many more over the next four years of this administration. Thank you very much for coming on the Chicago Booth Review Podcast.

Randall S. Kroszner: Thanks for your questions.

Hal Weitzman: That's it for another episode of the Chicago Booth Review Podcast. If you liked it, please subscribe and please do leave us a five-star review. I'm Hal Weitzman. This episode was produced by Josh Stunkel. Join us again next time for another episode of the Chicago Booth Review Podcast.