How the Fed fights back, with Don Kohn

Episode Summary

Executive Summary: The episode examines Donald Trump’s escalating pressure on the Federal Reserve, including attacks on Jay Powell and Lisa Cook, and the resulting threat to Fed independence. Ex-Fed Vice Chair Don Cohn argues this is the most serious attack on the institution he has seen, but says Powell’s pushback may strengthen morale and public support. The discussion also covers possible Trump chair picks, the Fed chair’s real power, rate-cut logic, and the Supreme Court’s pivotal role in protecting the Fed’s for-cause removal standard.

Main Topics: Trump’s assault on Fed independence (Priority: 5/5): Cohn calls the DOJ probe into Powell and the attempt to remove Lisa Cook a direct effort to intimidate Fed officials into aligning with presidential preferences on rates. Powell’s response and institutional morale (Priority: 5/5): Powell’s public rejection of the DOJ’s rationale is presented as a constructive warning shot that could rally Fed staff, Congress, and other central bankers behind independence. How powerful the Fed chair really is (Priority: 4/5): The chair leads agenda-setting and persuasion, but decisions remain collective; Cohn emphasizes that influence comes from convincing the FOMC with evidence, not command-and-control. Trump’s possible Fed chair nominees (Priority: 5/5): The conversation compares Kevin Hassett, Kevin Warsh, and Chris Waller, focusing on their views of independence, inflation, QE, and whether they would follow Trump’s preference for low rates. What rate cuts could be justified by economics (Priority: 4/5): Cohn says cuts could make sense only if tariff-related inflation fades, core inflation returns toward 2%, expectations remain anchored, and labor-market softness persists—far short of Trump’s desired drastic cuts. Supreme Court case on Lisa Cook and Fed precedent (Priority: 5/5): The upcoming case is framed as crucial because weakening the ‘for cause’ standard would make it easier for future presidents to remove governors for minor infractions. Longer-term policy lessons from the financial crisis and productivity (Priority: 3/5): Cohn defends the 2008-09 crisis interventions and notes that stronger productivity growth, possibly helped by AI, could support higher growth without inflation.

Key Arguments: Trump’s DOJ probe and pressure on Lisa Cook and Powell are pretexts for gaining control over monetary policy rather than legitimate law-enforcement actions. Powell’s decision to call out the investigation may improve morale inside the Fed and strengthen resistance to political intimidation. Fed independence is protected by Congress through fixed terms, budgetary independence, and the structure of the FOMC, but those safeguards are under strain. A new chair would need to justify lower rates through conventional macroeconomic reasoning tied to the dual mandate, not to help finance the deficit. Using the Fed to reduce government financing costs would be inflationary and outside the Fed’s mandate. Chris Waller is described as more of an institutionalist, while Kevin Hassett’s public support for the probe raises sharper independence concerns. Kevin Warsh is seen as knowledgeable and respected but also strongly critical of QE and the Fed’s crisis-era actions. The Supreme Court’s Lisa Cook case could redefine ‘for cause’; if weakened, it would set a dangerous precedent for removing governors over minor past issues. Powell’s investigation is expected to amount to nothing, while the Lisa Cook case is the bigger threat to institutional independence. The Fed should continue following the Volcker-Greenspan-Bernanke-Yellen-Powell model: data-driven, evidence-based, and focused on the statutory mandates.

Data Points: Powell’s term as Fed chair ends: May - Timeline for the impending replacement process. Recording time referenced: 4 p.m. Tuesday, Jan. 13 (UK time) / 11 a.m. East Coast - Transcript includes a timestamp for the interview. Fed chair term length: 4 years - Cohn cites the Fed Act’s fixed term for the chair as a key independence safeguard. Federal Reserve governor term length: 14 years - Cohn notes long, fixed governor terms as another independence protection. FOMC voting members: 12 - The chair is one vote among 12 voting members on the rate-setting committee. Crisis-era productivity growth since end-2019: about 2% - Cohn says productivity has accelerated relative to the pre-COVID trend. Pre-COVID productivity trend: 1.25% to 1.5% - Estimated long-run productivity growth before the pandemic. Possible AI boost to productivity growth: half a percentage point - Cohn says AI could add roughly 0.5 percentage points to productivity growth. Federal Reserve SEP long-run growth estimate: 1.8% - He notes the Fed has not yet raised its long-run growth estimate. Unit labor costs over four quarters leading up to Q3: 1.5% - Used as evidence that wage/cost pressures may be compatible with lower inflation. Inflation target: 2% - Cohn repeatedly refers to the Fed’s inflation goal when discussing rate-cut justification.

Pivotal Quotes: "This is really serious, certainly the most serious attack on Fed independence in my experience." — Don Cohn: Cohn opens his assessment of Trump’s actions against Powell and Cook. "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." — Jerome Powell (quoted in transcript): Powell’s explanation of why the DOJ investigation is, in his view, a pretext. "I think the Federal Reserve should not be in the business of helping finance the federal deficit." — Don Cohn: Cohn rejects the idea that lower rates should be used to cut government borrowing costs.

Implications: The episode signals a high-stakes test of U.S. central-bank independence. The Supreme Court, Congress, and Fed insiders may determine whether the next chair is chosen for expertise—or presidential loyalty.