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Alexis Madrigal: Welcome to Forum. I’m Alexis Madrigal. A country’s central bank is an important institution. While there are different ideas about how a central bank should work, an independent central bank tends to be a sign that a country’s political and economic institutions are stable. So, as President Trump’s new appointee to the Fed chair seat, Kevin Warsh, settles in this week, we look at what’s happening here in the United States with our central bank, which has been under tremendous pressure from the Trump administration.
We’re joined this morning by the makers of a new Frontline documentary, The President Versus the Fed. James Jacoby is director, producer, and correspondent. Welcome, James.
James Jacoby: Thank you for having me again.
Alexis Madrigal: And we’ve got Anya Bourg, who is producer on the documentary. Welcome.
Anya Bourg: Well, thanks so much. Great to be here.
Alexis Madrigal: James, let’s start with you. Today is the first day of new chairman Kevin Warsh’s term, obviously nominated by President Trump. What do we know about him?
James Jacoby: Well, we know quite a bit about Warsh, except what he’ll do. What we know about him is that Kevin Warsh has served on the Federal Reserve Board. He was a governor for many years. He is a Republican, but very much of the old-guard Republican tradition, not necessarily a MAGA Republican.
We know that he has worked on Wall Street. He’s worked at some major hedge funds as an investor and adviser, including to Stan Druckenmiller’s major hedge fund in New York. We know that he has, in the past, been a major hawk on inflation, meaning he’s been very concerned about high inflation. He’s been a critic of Fed policy over the years. He was a big critic of how the Fed kept interest rates extremely low and used all sorts of other instruments to keep the economy stimulated in the wake of the Great Financial Crisis. He came out quite vociferously against the Fed’s policies at the time, worried that a lot of them would stoke inflation—which didn’t really happen.
We know he’s been critical of the Powell Fed and how it responded to the inflation crisis that cropped up after the pandemic. And we know that he’s been auditioning for this role for a really long time. He was one of the front-runners in 2017 when Trump went with Powell at the time. Trump chose Powell for a whole host of reasons, but Kevin Warsh was a front-runner. He’s wanted this job for a long time.
He has changed his tune on a few things—for instance, lower interest rates. He now is advocating, or has been advocating as he’s auditioned for this job, for lower interest rates. He thinks the economy can handle it. He has a theory about that we can get into later, but he basically is saying that this president has not just telegraphed, but explicitly said, that he wanted a Fed chair who would lower interest rates. And Warsh has basically indicated that he would be totally open to doing that.
The challenge will be what happens when he’s actually in office. And lastly, what we do know about him is what he said at his confirmation hearing. To those who might be skeptical of Warsh and worry about the independence of the Federal Reserve at this point, there was plenty of fodder for skeptics. He wouldn’t answer basic questions about who won or lost the 2020 election. And while attacked by Democrats as being a sort of sock puppet for the president, he has claimed that he would act independently and hasn’t come in with predetermined ideas about what he’ll do as chair.
Alexis Madrigal: Yeah. Anya, he was appointed, I believe, by George W. Bush the first time around. And as James was just noting, he was considered kind of an old-school Republican. He worked at the Hoover Institution down at Stanford, at least as a visiting fellow there. So how does he know Trump?
Anya Bourg: Well, I don’t know the extent of their personal relationship, but as James indicated, he was sort of auditioning for the job in 2017 when Jerome Powell was first appointed. So I think their relationship goes back at least to then.
Alexis Madrigal: That’s interesting. Anya, let’s stick with you here. For people who hear the words “Federal Reserve” thrown around, let’s give them the basics: what does it actually do?
Anya Bourg: The Fed is a sort of quasi-public, quasi-private institution. There are twelve regional Federal Reserve banks and a board of governors who vote on short-term interest rates. There’s kind of a rotating cast of members who vote. It’s this extremely important institution that is so little understood—a kind of gravity in the economic system.
Alexis Madrigal: Do you want to add anything, James?
James Jacoby: Yeah. I was actually going to add something about your earlier question regarding Warsh and Trump. One thing worth noting about Warsh is that he is married to Jane Lauder, who comes from the Lauder fortune, Estée Lauder. They’re now part of the Palm Beach set that Trump is in and out of, and I think they’re in that billionaire space.
Alexis Madrigal: She’s a billionaire. He’s, like, a hundred million.
James Jacoby: Hundreds of millions, yes. But together they’ve got quite a bit of cash, and they’re in that world. And his father-in-law is obviously very powerful in Republican circles.
Alexis Madrigal: Yeah. When we think about what the Fed has to do, they have these other tools, as you’ve noted. But the big one is setting short-term interest rates. So, James, why is that such a powerful force in the American economy?
James Jacoby: It’s the cost of money, right? By setting short-term interest rates, they’re lending to the major banks. It’s kind of an overnight lending rate. We don’t really think about it very much, but essentially that’s what banks can borrow from the Federal Reserve overnight—our central bank. Everything sort of follows from there in terms of how much money costs in our economy and how much it costs to borrow.
So while it’s not a one-to-one correlation, whether it’s home loans, car loans, Treasury debt, or what we’re paying in interest on U.S. debt, it really is the most powerful economic lever. The interest rate determines the cost of borrowing throughout the economy.
And of course, the bond market—which is this immense and difficult-to-explain entity with trillions of dollars in bonds being traded every day—is also determined by what the Fed does and how debt is priced in the economy. The ripple effects are tremendous.
Then, of course, central banks abroad are looking at what the U.S. central bank is doing. We’re the global reserve currency, so this also affects the value of our dollar.
The main thing to understand is that the Federal Reserve has two mandates from Congress. It’s meant to keep inflation low and stable—basically to protect the currency from inflation—and also to keep unemployment low and support robust employment in the United States. Sometimes, as we are seeing right now, those two goals can be in conflict with one another.
Alexis Madrigal: Anya, over this documentary and a previous one, you’ve looked at the way the Fed has tried to manage this dual mandate. And at least during the Biden administration, it seemed like it didn’t actually work.
Anya Bourg: Well, there was this unique set of circumstances after the pandemic where we had all this stimulus going into the economy and the Fed keeping rates extraordinarily low. We had the worst inflation we’d seen in forty years.
One of the interesting things in the film is that we had former Fed officials who admitted on the record that this was a mistake—that the Fed had kept rates too low for too long and hadn’t responded quickly enough to what was clearly inflation at the time.
I think it’s widely seen that there was a real policy mistake in the wake of the pandemic. And the Fed continues to be concerned about inflation as a result. They were singed by making that mistake.
Alexis Madrigal: James, one of the strangest things about the Fed—and this has been true since Alan Greenspan—is that it’s not just what the Fed does, like setting rates, but also what they say about how they’re seeing the economy. It seems like that alone can send the stock market up and down.
One of the complexities about Warsh is that he might want to lower interest rates for technocratic reasons, but it also might be seen as him simply doing Trump’s bidding. That sends a different signal to the market than acting based on the facts.
James Jacoby: Yeah, exactly. One reason it’s so important to have an independent central bank is that markets need to trust that the Fed is making decisions for the long-term health of the economy and not for political reasons.
That’s why Congress established the Fed in this way: making it difficult to fire people on the Fed Board, having rotating assignments over multiple years, and creating the regional structure Anya mentioned earlier. Independence matters because the effects of any announcement are tremendous.
Markets love low rates. They loved the period after the Great Financial Crisis when rates were low and the Fed was taking extraordinary measures to stimulate the economy—essentially buying a lot of assets and expanding the Fed’s balance sheet by trillions of dollars.
That was tremendous for Wall Street because it meant money flooding into the financial system. It wasn’t necessarily as successful as a stimulus for Main Street.
What’s interesting is that Anya and I have done several films critical of Fed policy and how it exacerbated income and wealth inequality by pushing asset prices so high through low rates and easy money. What’s so strange about the Trump situation is that we’re now talking about the very basics of Fed independence and central bank independence, which has obscured important conversations about critiques of the Fed—some of which Kevin Warsh himself has raised.
He’s been a big critic of how the Fed exacerbated wealth inequality. One thing he wants to do is pull back on the Fed’s balance sheet again—its purchase of assets that only push prices higher. It remains to be seen how that goes over. Wall Street is watching very skittishly to see what he does.
Alexis Madrigal: We’re talking about the leadership changes at the Federal Reserve and the future of the central bank. After the break, we’re going to take a deeper dive into the new Frontline documentary, The President Versus the Fed, about the battle between President Donald Trump and outgoing Fed Chair Jerome Powell.
We’re joined by James Jacoby, director, producer, and correspondent with Frontline, and Anya Bourg, producer with Frontline. They’ve been working together on these issues around the Fed. I’m Alexis Madrigal. Stay tuned for more right after the break.
