The Federal Reserve has a huge impact on the economy and particularly on the housing market. But after the recent presidential election, people are wondering, what is the future of the Fed?
Everyone, it's Dave. Welcome to the BiggerPockets podcast. And today I am joined by Nick Timmeraus, who is a reporter for the Wall Street Journal and one of the foremost fed reporters in the entire country. And we actually recorded this podcast to go on our sister podcast on the market, but this is such an important topic for real estate investors that I wanted to air it here on the BiggerPockets podcast as well.
If you're not familiar, the Fed stands for the Federal Reserve, and although they don't directly set mortgage rates, they have a huge impact on the economy, and particularly on real estate because they help set borrowing costs, and as you probably know, most people who operate in real estate investing borrow a lot of money.
So Fed decisions and policies have a huge impact for all of us. So I wanted to give everyone the opportunity to listen to what Nick has to say about the future of the Fed because it's probably going to impact each and every one of us. Let's jump into my conversation with Nick.
Nick, welcome back to the show. Thanks for joining us. Thanks for having me. So you're here and I'm going to ask many questions about the future of the Fed. But maybe you can help bring us up to speed. We all know that there was a Fed meeting right after the presidential election. They cut the federal funds rate by 25 basis points. But what else happened in the last meeting that I and our audience should know about?
Well, I think the big question right now is, you know, is the economy going to avoid a recession? And if so, you know, the bond market certainly thinks so. And so you've seen yields rise. I mean, it's unusual, right? The Fed has cut now 75 basis points this year. And you've seen the 10 year treasury yield go up.
I don't know, a half point, probably not what a lot of people expected. And so I think the big question now is, you know, what happens from here, both on the policy side, Donald Trump's policies are a little bit unclear exactly how far he's going to go on tariffs, tax cuts, spending cuts, regulatory rollback. What does that mean for growth? What does that mean for inflation? There's going to be a lot to digest.
Got it. Yeah. And just to make clear what Nick's talking about here, we've seen that the Fed has cut, you know, first 50 basis points, half a percentage point back in September, then we had a quarter point cut here in November. But at the same time, mortgage rates have gone up for all of us in the housing market. And that's because Fed doesn't control mortgage rates. That is much more closely tied to the bond market and
When the bond market believes that there is less risk of a recession, bond yields usually go up and take mortgage rates up with them, just a quick primer on why mortgage rates have gone up in the last couple of months. Now, Nick, you know, obviously we're going to unpack some of the stuff that you talked about in terms of policy, but after every Fed meeting, there is a press conference that some of us pay a lot of attention to.
Did Jerome Powell and his press conference give any indication for what the Fed might do in the coming months? Or should we be expecting more rate cuts? Yeah, I mean, the Fed has signaled they expect to keep cutting rates. And so Powell repeated that view. I think in terms of the economic outlook, maybe the most interesting thing Powell said was around the forecast for inflation, because inflation is looking maybe a little bit firmer than expected. And Powell said,
that they still expect inflation to come down because what they really see right now is that the firmer prices are an echo of past strength in the economy. They don't see new sources of heat if you think about a fire. They don't see the fire reheating sort of on its own here. They think these are catch up increases in prices. And what would be an example of that?
You know, your car insurance premium has gone up because car prices went up a lot two and three years ago. It's not that there's something new that's running through the economy. These are sort of the echoes of earlier price increases. And so if that's your story on inflation, then that suggests less concern that you'd have to do something different from interest rates
from what you were expecting. The Fed had said they were going to cut interest rates. You still think inflation is coming down, then you're not going to react maybe quite so much to these a little bit stiffer than expected inflation readings.
Okay, so we still have to see what happens. I think there's one more meeting this year in December, so we'll see what happens there. But it seems like the general consensus is still that the Fed intends to cut rates and get to a lower federal funds rate in the next couple of years. We just don't know exactly when and how rapidly those rates might come. At least that's the last thing that we've heard so far.
Now, of course, we all like, you know, sort of speculating and want to know what's going to go on with the Fed because it does have big implications for the economy and for the housing market. But there's sort of this other storyline that's been going on since the presidential election. And you actually, Nick, wrote about this in the Wall Street Journal, sort of about the future of the Federal Reserve and whether or not Jerome Powell might be staying in his position. So can you just give us a primer on that situation?
Yeah, you know, Powell was made Fed Chair initially by Donald Trump in 2018. Of course, Trump soured fairly quickly on his selection because the Fed was slowly raising interest rates at that time.
and Trump didn't think that inflation was a problem that needed to have kind of preemptively higher interest rates. The Fed stopped raising interest rates and actually cut a little bit in 2019 because of some concerns that global growth was slowing inflation was not picking up. And so there had been questions over whether Trump could fire the Fed chair. He had sort of vented to his advisors in 2018 and 19. I don't like this Powell guy. I'm stuck with him.
you know, can I get rid of him?" And they told him, no. They said, there's a four-year term for the Fed chair. He also has a 14-year term as a governor. The Federal Reserve Act, which created the Fed, says that you can only replace a governor, a Fed governor, for cause. And that's been interpreted by a court to mean malfeasance and propriety, you know, incompetence, not just, I don't like what the guy's doing with interest rates.
OK, so Donald Trump loses in 2020. Biden comes in. Biden reappoints Powell in 2022. And the concern that the Fed chair would be fired is sort of over until Donald Trump comes back and people begin to ask him, well, what are you going to do with the Fed? Would you try to replace Powell? Now, what Trump has said this year is, no, I wouldn't try to replace him as long as he's doing the right thing.
which is sort of an interesting condition to it. It's not an unconditional pledge. It's, well, the current situation things seem fine. You know, I will point out Trump has been very clear that he regards inflation as a serious problem. He called it a country buster that you have to fix inflation. But at the same time, Donald Trump has always preferred low interest rates. So a number of people have been asking, well, would Trump decide to
try to push power out again if he thought maybe the fed wasn't cutting interest rates fast enough or he just wanted to have his own person in there and there are some people in the president's orbit you know allies of the president who have been saying no we really think you could get this guy out if you wanted to there are other people around the president who think that's a horrible idea right i should say the president elect
who think this is a horrible idea. You don't want to do this. You don't want to mess with the Fed right now, especially when bond markets are kind of looking ahead and saying, wow, deficits are a lot higher than they were four years ago. Inflation has been a problem. So you start to interfere with independent monetary policy and you might not like what the bond market does.
All right, time for a short break, but we'll be back with Nick Tamarouse on Fed independence and how the Trump-Powell relationship might look right after this. Tired of the headaches that come with hunting down sufficient rental property insurance? Well, say goodbye to the endless calls and all the stress with National Real Estate Insurance Group, or as they call it, Enreg. With Enreg, you can customize your coverage, easily manage it online, and keep every property you own regardless of occupancy status protected on one monthly schedule and bill.
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everyone. Welcome back to the show. I do want to ask some questions just about the legality of all this, but maybe we should just talk about independent monetary policy. You just stayed at that and, you know, the Fed sort of operates in this gray area, right? You know, the Fed governors and the chair are appointed by the president. They are not elected officials, but they sort of
have had historically this space where they don't need government approval for their decisions, right? So when Jerome Powell and the rest of the Fed governors decide to change interest rates, the federal funds rate, they don't need approval for the president or from Congress, right? That's right. It's a very peculiar setup because normally, I mean, you wouldn't
Take a committee of tax experts and say, all right, you guys are in charge of tax policy. You go decide how much. I mean, those are very political decisions. So why is it that when we talk about independent monetary policy, well, why do we have that? Well, first of all, what is independence? I mean, I think it sometimes can get over torqued.
to mean that nobody can ever second guess the Fed. What it really means is they have some degree of operational autonomy. Congress and the executive branch set up the Fed and over time decided the Fed should set interest rates with an eye towards keeping inflation low and stable. They call that price stability and then maximum employment. Or I would call that a solid, a good, later market outcome. You want to balance those two goals and sometimes they're in conflict. But we're going to let the Fed
figure out how to do that with really one instrument, which is interest rates. So they have the autonomy to do that. And why do they have that? Well, a couple reasons. One is that we've found through history that when you let political factors dictate
what should happen with interest rates i mean you're always politicians always want to win the next election so you'll always sort of accept some stimulus today and if it overheats the economy i.e. if you have a little more inflation well that's okay because you know we'll take that risk and you want to have an independent central bank to come in and say actually no we need to make sure that inflation doesn't get out of control that's what happened in the nineteen seventies and so after that central banks around the world
sort of fought for more autonomy or independence. And governments gave it to them because it seemed like a worthwhile trade-off. The other reason I think we have this arrangement where central banks enjoy more independence is, you know, frankly, Congress doesn't want to make these decisions to raise interest rates. They're unpopular. They're difficult decisions. And so they're able to blame the Fed. They're able to say, well, I'm not the one that made your mortgage rate or your auto loan rate go up.
You know, the Fed did this. And so you can sort of blame the Fed. They become a convenient scapegoat for political purposes. So, you know, it's not written in stone anywhere that the Fed should be independent. It's sort of a norm that has developed over decades, really, with some trial and error. And so that's why we have the system and arrangement that we have.
Well, that's a great explanation. Thank you, Nick. And it makes clear some of the arguments for Fed independence. Like you said, it's a convenient political scapegoat as one reason. And it might help mitigate political short-term thinking by either party. But what are some of the criticisms of Fed independence?
Well, I think the criticism of it is why do you have this unaccountable and very powerful institution? And I mean, this is how I believe Trump thinks about it is he owns it. If the economy is doing well or if it's not, you know, people are going to hold him accountable. So why shouldn't he have more say over what this very important interest rate setting body is doing?
with policy. His advisers said to me when he was president, he doesn't really understand this fetish around Fed independence. He thinks that if the Fed's doing the wrong thing, he should be allowed to say it. For 30 years before Trump was president, there had been this soft norm really begun by Bill Clinton and then continued by George W. Bush and Barack Obama that the president wasn't going to opine on monetary policy.
And the reason Clinton did this, he had an economic advisor who later became Treasury Secretary Bob Rubin. Bob Rubin had been at the top of Goldman Sachs and he had seen how George H.W. Bush in 1991 and 1992 was in a fight with the Fed. He was arguing that the Fed shouldn't cut interest rates more and the Fed didn't always go along. And so Rubin saw this and he said, well,
This exposed how weak actually Bush was. You create concerns in the market that the Fed's not going to be as focused on inflation. That consent interest rates up. You also fight with the Fed and you lose. It shows that you're weak. So he went and said the White House is not going to talk about monetary policy. Now, Donald Trump decided he should be allowed to have his say because he thought, well, if these guys are really screwing it up, somebody needs to stop them.
One final point on this is, you know, the Fed does try, especially compared to 30 years ago, you know, part of defending their independence is being more transparent about what they're doing than why. And so that's why you see all of the speeches and, you know, they release the minutes, they release the transcripts, verbatim transcripts of their meetings, albeit with a five-year lag, but they're trying to show people that, you know, this isn't some
political operation that they're running. They actually are informed by what they think is the best thinking and analysis and they try to justify their decisions. And so that's sort of a way to guard against the risk that, well, this is just an unaccountable fourth branch of government and we should wipe this away.
Nick, you've told us a bit about how President-elect Trump thinks about Fed independence, but what do other politicians think about this? How is Fed independence generally seen in Washington? Well, up until recently, at least, Senate Republicans, when I would talk to members of the Senate Banking Committee, which is the committee that has jurisdiction over the Fed,
They were quite supportive of Fed independence and they were certainly supportive of it. The last time Donald Trump was president, once he realized he didn't like what he was getting from the Fed, he began to suggest nominees who he thought would be more loyal to him. And some of these nominees were seen as not terribly qualified by Senate Republicans and they resisted. I think the big question going forward is
You know, are things different now? Trump seemingly has a broader political mandate than he did eight years ago when he was elected. So do Senate Republicans push back on this more? Or do they say, you know, if Trump wants his way with the Fed, he's the president, he's entitled to it. But generally, the Senate has been sort of a bulwark to support this idea of having a more independent monetary policy.
And does that go for the business community as well? I think so. I mean, I think, you know, we haven't really run the experiment here of what would happen if you had a Fed that maybe was seen as more responsive to political factors. You know, I should know some people think the Fed is very political and that they take politics into account in everything they do. If you talk to people who are former Fed officials, they completely, you know, reject that idea.
But these are difficult economic judgments you're making. Will tax rates boost growth without inflation? Will deficit spending boost growth without inflation? If not, do you have to raise interest rates? You can't kind of divorce those from whatever you think about what taxes are spending due to the economy. So there's always going to be some room for interpretation.
Let's get back to where we are today. Obviously Trump was elected just a couple of weeks ago and there has been more speculation recently about whether Trump will try to fire Powell right away or he'll ask him to step down. But from what I've seen, Trump actually hasn't suggested that he's going to fire Powell or ask him to step down. Is that right, Nick? That's right.
Okay, so is the new renewed speculation basically just based on things that happened back in 2018? I think it's a part of that. And it's also the fact that you've had some advisors around Trump arguing for a more muscular executive branch. I think the reason you're seeing the questions now after Donald Trump's reelection is people want to know where are the guardrails going to be
in a second term. And so they're asking these questions. You know, Donald Trump, would you try to replace Powell? He has not said that he would. And people are going to ask the Fed chair the same thing. And how has Powell responded to those questions?
Powell's responded to those questions exactly the same way that he did five years ago. He said five years ago that he has a four year term as chair and he intends to serve it. And he was extremely direct at the press conference in early November when he was asked, do you think the president has the authority to replace you? It was a one word answer. No. We actually pulled the audio of that interaction. Here's the clip.
Some of the President's elect advisors have suggested that you should resign. If he asked you to leave, would you go? No. Can you follow up on, do you think that legally you're not required to leave? No. Do you believe the President has the power to fire or demote you and it has the Fed determined the legality of a President demoting out will any of the other governors with leadership positions? Not permitted under the law.
Not what? Not permitted under the law. All right. Super interesting. Thank you, Nick. So it seems like Powell is pretty dug in on serving out the rest of his term. So how might this play out, Nick? I won't ask you to predict the future, but what are some of the possible scenarios from here?
Well, I think the main scenario is that Powell just serves out his term. It ends in May of 2026. And so that's 17 months of the next four years of Trump. I think that is the base case scenario. Could Trump change his mind and decide to do something? Of course. So what would happen in that scenario? I mean, if you want to go into that kind of hypothetical rabbit hole,
Well, one scenario that Trump's advisers floated last time was, okay, the law says you can't fire him as chair. And his advisers told him last time, you can't do this. And I reported recently that in 2018 and 19, when this did become an issue, Powell told
Treasury Secretary Stephen Mnuchin, I will fight this. You need to know that I will fight this if people want to make an issue of this. And of course Trump didn't fight it, right? He later tells Powell in a phone call. He described this phone call to some other people. He said that he had told Powell, I guess I'm stuck with you. And so even though Trump talked a lot about potentially replacing Powell, he never did it.
And it's possible he never did it because he knew that there would be a legal fight, that it would be very disturbing of markets potentially. And so his advisors had come up with this idea, well, you can't fire him, but maybe you could demote him as the chair. Why would you do that? Well,
The law that creates the chairs for your term is silent on the four cause removal protection that the governors have. So there are some people who said, well, maybe you could just demote him and then could you elevate somebody else into the chair. Seems like a lot of effort to do that for just, again, you know, a 16 or 17 month term that Powell has left.
And then if you look at different court rulings and opinions from Supreme Court justices, a number of them have sort of said they see the Fed as different, that monetary policy, the history of the Fed, and the predecessor institution, the second bank of the US.
create some reason to think that maybe the Supreme Court would rule in favor of the fatter Powell on this. But I will stipulate, you know, we're talking about sort of extreme tail risk hypotheticals here. Yeah, so it sounds like the most likely scenario is that Trump and Powell find a way to work together for the 15 or 16 months, as you said, of Trump's second term. And then Trump would
Correct me if I'm wrong, then he could name his new chairperson. But does that chairperson have to come from the existing Fed governors, or would he be able to appoint someone completely new?
He'll be able to appoint someone completely new because the way the Fed governor's seats work is one of them turns over every two years. So in January, 2026, one of the current Fed governors, her term will expire, Adriana Cooler's term will expire. And so on February 1, 2026, Trump will be able to put somebody new into that job. And that's about four and a half months before Powell's term.
as chairs up. So presumably whoever gets that seat could become the chair for months later. And if anybody else on the Fed board retires early, maybe they take a Fed governor, Mickey Baldwin, and make her the head of a bank regulatory agency that would give you another vacancy to fill on the board.
So people don't normally serve their entire terms. If people step down early, then that gives you other vacancies on the board. But, you know, this isn't difference from eight years ago in Trump's first term. When he took office, there were a lot of vacancies on the board. He had an opportunity early to remake the Fed. He had up to five vacancies in his first 13 months. And this time, if everybody stays and nobody leaves early, he'll only have one vacancy in his first two years.
All right, time for one final break, but stick with us. More on the future of the Fed and how different scenarios might affect the market on the other side.
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Okay, so of course no one knows what's going to happen, but it sounds like the most probable scenario again is that Trump and Powell choose to work together for the first 12, 16 months. And if at that point, Trump is unhappy with the direction of the Fed. He'll have the option to name a new Fed governor.
who could then be appointed by Trump to be the chairperson of the Fed. And, assumeably, that person would have monetary policy inclinations that are more aligned with President-elect Trump's. And so, sounds like, Nick, you believe that's more likely because rather than sort of go through this potential legal battle, that Trump will have a chance to name a new Fed chairman anyway within the first two years of his second term.
That's right. You'd go through potential legal battle. The market might react very badly. I mean, economists that talk to you think this before a court would even pick it up. The market would react in such a way that everybody would reconsider whether you really wanted to go kind of the nuclear option here to the courts. It would probably be harmful for everybody involved.
It'd be a lose-lose for the Fed, even if you won this decision. I mean, I think people have said to me, well, why is Powell? Why would Powell be so committed to this? Is it kind of personal ambition? And the answer is no. This is about defending a principle of central bank independence. If Powell were to resign at the President's asking, you'd establish a new norm that the Fed share answers to the President, and if
The president doesn't like the monetary policy he's getting, then you just replace the Fed Chair. That would be a completely different turn from the central bank that we've had for the last 50 or 60 years.
Nick, do you think it's possible that Trump and Powell are actually more aligned than people think they are? Because we've just talked about that the Fed intends to keep cutting rates. Trump has said that he'd like lower rates. So is it possible that they are actually trying to do the same thing? It is possible. I mean,
The Fed's goal is to have the soft landing, right? To have inflation come down without a downturn. It's what we've seen signs of happening this year. I think the challenge here is that Trump's policies, it's very hard to know how to model them.
is a couple examples. Regulatory rollback, you could see that as something that might help with inflation because you're increasing competition, you're making it possible for the productive capacity of the economy to produce more goods and services. So that could be disinflationary. Tax cuts, how much growth do they create? Are you increasing deficits and are you going to have to
compensate investors more to buy a treasury security, to buy a treasury bond that could cut in different ways. Tariffs, I think, are a wild card. There's an argument that even if tariffs increase prices, they only send up the price once.
Inflation isn't a one-time increase in the price level. It's a year after year increase. So the question right now is with the Fed, how would they react to a one-time increase in a tariff? Would you allow prices to go up once and then say we're not going to try to offset that with tighter monetary policy because that could create a slowdown that you don't think is necessary if you don't think inflation is going to be a problem?
or there's a world in which officials conclude, we just went through these inflationary shocks. Now consumers have become accustomed to inflation. Unions are bargaining for higher wages when prices go up. That's maybe a different
inflationary environment we could be in where the Fed decides that they have to raise rates if tariffs go up. That would be something that I would think the Trump administration would be quite frustrated about. So it's a little bit like shaking up a soda bottle and trying to predict how much is going to come out when you open the lid, how quickly you open the lid. There are different forces and I think modeling Trump's economic policies for the Fed is just going to be more challenging.
Well, thank you so much, Nick. Although we don't know exactly what's going to happen, one thing has been made clear is that it's going to be a very newsworthy and eventful year for the Fed. And we will be certain to keep our audience here posted about any news that impacts the economy and the housing market. Nick, thanks so much for joining us today. Thanks for having me.
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