Fed under fire: Examining the future of the central bank and U.S. economy under President Trump

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Welcome to this week's episode of What's At Stake. I'm your host, Ylan Mui, a managing director at Penta.

Today we're talking about the Federal Reserve, which charts the course for the nation's economy and ensures the safety and soundness of our banking system. Now, historically, this has been considered an apolitical institution. But that has changed since President Trump took office. He's threatened to fire Fed Chair J Powell.

He's now calling on another top official at the Central Bank to resign. He's even raised questions about the cost of renovations of the Fed's headquarters in Washington, and perhaps most importantly, he wants the Fed to cut interest rates.

To help us sort through all of these dynamics, we're joined by Heather Long, Chief Economist at Navy Federal Credit Union. And a contributing columnist at the Washington Post. Before joining Navy Federal, Heather spent nearly two decades as an award-winning economic journalist at the Washington Post CNN and her hometown paper, the Patriot News.[00:01:00]

She's known for breaking down complicated economic stories without the jargon, which hopefully will do for us today. Heather, thank you so much for joining the podcast.

It's great to be here, and people should probably know that I sort of filled your seat at the Washington Post on the Federal Reserve beat.

So it's an honor to be here with you as well. Talking about the

F, everything comes full circle. You took it to new heights, that's for sure. So let's just start at the very beginning. I'd like to just kind of set the scene for folks and help us understand the role of the Federal Reserve in the American economy.

Why is it so important that the Fed is an apolitical institution?

It's a great question and certainly one that's being reexamined right now. I think that people who know nothing about the Fed or you know, why do we need this in the United States, I always say, look, it's really for two things. You know, technically it's to manage the money supply, the amount of credit that's in the [00:02:00] economy, but really.

To be there to help in times of financial crisis. I mean, the Federal Reserve started in 1913, right after a bunch of bank runs and bank panics that had happened in crises in the United States between the end of the Civil War and the early 1900s. And this was like a bipartisan, we need to fix this.

And what's interesting, I've lived in some other countries in the UK and Honduras for a while. And when you live abroad or, and, uh, not the United States, you realize the US has a very unique banking structure. I'm talking to you as the chief economist of a credit union. You know, we have thousands of different banks and credit unions in this country.

Most countries don't have anything like that. You know, it's a very narrow number of banks or, or financial institutions. And so that, and historically there's a lot of reasons that happened, but I think. That has ex, that was exacerbating some of the problems in the United States before. There was kind of one central parent, if you will, in [00:03:00] the room to help out, to monitor, and to really take care and step in.

When there were panics and there were crises and there were times of trouble, and you say, why does independence matter? Well, no, it doesn't really matter. In the good times, good times are easy. You know, not many banks are failing. Not many bank runs are happening. But look at the pandemic. Or look at the Great Recession.

Uh, that was one of the first things I cut my teeth on. And working in London at an investment firm in those days. And, you know, everyone was hanging on every word of the Federal Reserve and that around the world, not just in the United States. And that's when that credibility really matters. When you need to step in, in the moment of crisis, tell people to calm down, tell them what the plan is, and have them believe that you will execute that plan appropriately.

Can you explain to us, I guess, how this works in practice? Because certainly the Federal Reserve Chair and the members of the Board of Governors [00:04:00] are nominated by the president. They're confirmed by the Senate, so there is, there is some element of politics, I guess, involved in their position, at least for, for the Board of Governors.

You're right. I always say it's a lot like journalists, right? People are striving to be apolitical, nonpolitical at the Fed, but they're human at the end of the day. And a lot of people have served in various political capacities, but when the Fed was created, I think one of the neat things that they did is they didn't invest all the power in one person or even two or three people, and there's seven people who go through the process you outlined of being nominated by a president.

And then confirmed by the Senate for potentially a 14 year term. Most people don't serve all 14 years, but it was kind of mimicking that Supreme Court, let's get them in there for a long time. But then there's all these other people always forget, there's 12 other regional fed banks that are appointed.

The leaders there are appointed by the community leaders [00:05:00] in that region. Uh, you know I said at Navy Federal Credit Union in Virginia. And so we. Talk a lot to the Richmond Fed Branch. And so those folks are often forgotten, but that's 12 of the 19 members of the Fed leaders are not coming from Washington DC and are not coming from this hyper political process.

And that's that check and balance on the Fed system.

So it sounds like just the structure of the Fed was created, um, with the idea in mind that. Powell would be somewhat decentralized and democratized, and to try to create internal safeguards around some of the political pressure that the Fed has found itself under.

Of course, I just outlined at the top of our conversation some of the. Things that they're facing right now. But certainly in the past, the Fed has also faced enormous criticism from from Presidents directly. There was of course, the time that [00:06:00] Richard Nixon pressured Arthur Burns into trying to pursue and successfully pursuing a more expansionary monetary policy.

There's been protests from farmers and contractors during the 1980s when we saw interest rates that were extraordinarily high as the Fed tried to tamp down inflation. So. Was the Fed, did the Fed's independence come into question during these previous periods, or is this time really different?

You're right.

Uh, you, you always say it so well. You can tell you're a great former fed reporter as well. But, um, I think to me what's different this time is it's so out in the public, the criticism. You know, you talk about Arthur Burns and Richard Nixon, that was a lot more behind the scenes. Uh, and I'm gonna intimidate you behind the scenes sort of thing.

But the public didn't really know what was going on. The public wasn't sitting there. I mean, I have high school friends who definitely didn't go major in economics. And they're call texting me, asking me, what's going on with the Fed? Uh, it's getting into this consciousness. So even if the president doesn't succeed [00:07:00] and, uh, and totally taking over the Fed he's undermined a lot of public confidence in the institution.

The other thing is it's just constant. It's so constant. And even as someone who covered the Fed in the first presidential, first term of President Trump, I, I remember right around Christmas time in 2018 was the first time that, uh, Trump, the President Trump suggested he would potentially fire fed Chair Powell.

And I remember writing that front page article and the markets going down. But it, you know, it would sort of die down for several months and before it would come back. This is like every week, every week hammering, every week hammering here in term two. And I think this time around, what's different is it comes within a push from the White House to broader reset the economy in so many different areas through the tariffs, through the intervention, like we saw with taking a 10% stake in Intel.

Or pressuring, whether it's um, universities or law firms or media outlets [00:08:00] to go a certain way or make a certain settlement or payout. Or even semiconductor companies like Nvidia, you know, the hottest company in the world. Uh, um, arguably and even. Being able to pressure them into a certain deal in order to export their chips abroad, having to give a certain kickback, if you will, to the government.

So that's what feels different this time. It's not just pressuring the Fed like he was trying to do in 2018, saying, I, you know, I want lower rates. I don't like what you're doing. It's coming in part of this broader remit that the executive branch should have a lot more authority across the economy.

And I do wanna get into some of those other sort of points of debate as you were bringing up.

Um, but just to stick with the Fed for a second. I think that you kind of crystallized something for me when you said sort of the constant attacks. That's one thing that's different from even during the first Trump administration when folks kind of thought they knew what the playbook would be. The other thing that feels a little bit different is that.

The tactics seem a little [00:09:00] bit different. So not only is he urging the Fed to lower interest rates, which one would expect a president to want from the Federal Reserve, but also questioning, you know, how much are you spending on your renovations of your building? Questioning. Let me check the paperwork that you used when you, uh, actually, uh, received this position or were confirmed for this position.

So it seems like there's some. A wider array of tools at his disposal to try to go after the folks in the Fed that he thinks are making the wrong policy decisions.

Yeah, that's right. And it's sort of on an acknowledgement that they agree or they think the court Supreme Court will agree that Fed leaders can only be removed, quote for cause, you know, going back to those early 1930s statutes around Federal Reserve leaders and how they're appointed and can be removed.

And so you're right, you see these aggressive attempts to try to. Come up with a [00:10:00] cause and hope it will maybe work in a legal court, but especially hope it works in the court of public opinion. I think what's really interesting, Elon, and we're already talking about this a lot at my institution, I'm sure every other financial institution in the country, and that is.

What happens after May, 2026? You know, federal Reserve Chair, Powell's time is limited. This was his last Jackson Hole speech he just gave. Uh, I remember sitting in his first one or two. So, um, but we all know it's gonna change. And how dramatically does it change? What does the next era look like? And the very, right after the election, I made my most popular TikTok video ever.

You know, it's just one. I'm sure you have so

many

now we got a few. I don't know about that. But anyway, um, but it was interesting. I said this and I would, I stand by these comments. I said the most important thing to watch. The Trump economy is going to be the [00:11:00] bond market, and it's crazy to say that as someone who got their start in financial markets 20, 20 to 25 years ago, like talking about the bond market was so dull back then, nobody wanted to be in the bond in the bond division.

But look, it's the bond market that continues to check this presidency. And, and it's when the bond market violently reacts like we saw in April or even when we saw when he got more aggressive about suggesting he might fire Powell earlier in the summer. That's what really nips in the bud and keeps in check a lot of these impulses that could really harm the economy and markets.

So I think that's gonna be more so than. Watching the daily threats and da da, da, da is, I watch the bond market.

Well, and, and I'd love for you to expound on that a little bit because one of the questions that I, that I wanted to explore was, even as we see these political fights happening.

Are we seeing a real [00:12:00] market impact? You mentioned that, you know, markets kind of gyrated the first time that Trump ever suggested that he might try to remove Powell. Is this, has this become just a story we're all familiar with, or are we starting to see actual economic impacts from just the fight, if not even the actual removal?

It's been muted so far. You're right. Uh, certainly in the spring it looked like that when people were talking about the Sell America trade, that maybe this is the end of the dollar as the global reserve currency and all of that looks incredibly premature right now. I remember holding up a, a, a match in a TikTok video to a dollar.

You know, like, Ooh, we gotta light it on fire. And luckily I said no. I said, I think people are going too far on, on this and, uh, pocket that dollar. Heather, we need everyone we can get. But anyway but yeah, I think where we're at now is there's a little bit of a premium in the bond market. I think one could argue, but it's very small, you know, a little bit of a risk [00:13:00] that inflation could.

Could reignite a little bit of a risk that someone who could be appointed at the Fed, who as the next Fed chair, who could take things in a wildly different direction. But you're not seeing the huge fear factor that you were seeing a couple of months ago that doesn't come back. And that's what's really hard.

I mean, we spend a lot of time as a financial institution. Thinking about risk management. Anyone who lives with a great recession does not sleep well at night if your job is risk management. But I think it particularly, it's hard to, you're trying to forecast, like you said, this is very tricky, you know, who eventually gets appointed.

I also covered the, all the appointments that the President Trump made to the Fed Board in his first term, and three different people were rejected in the US Senate. So it's not, now it seems more like a rubber stamp, you know, it seems more like a rubber stamp here in term two, but it is no guarantee. And so, again, how much market pushback, if Wall Street picks [00:14:00] up the phone and calls those US senators, they're gonna, things could change.

So, Heather, I have to play the Fed stakes for a second here. Have you all gamed out who you think the most likely contenders are to replace Powell?

Well, I'm no longer in the business of being the journalist whisperer that I once. So your guess is as good as mine. Um, I think, you know, from sitting here today, it feels like it's really maybe Chris Waller or Kevin Hassett, but those are, to my eyes, those are very different directions. You know, Waller is someone who would be seen, you know, it's a slight change, but not a dramatic change.

I think Kevin Hassett, I've known him a long time. I know you have two, uh, you know, would be a much more dramatic shift. Someone who really buys into the notion that it needs. Potentially needs to be broken and rebuilt like so many parts of the economy that we've seen in the Trump era, Trump two era in particular.

So you mentioned that this has been [00:15:00] Chairman Powell's last time speaking at Jackson Hole, which is the annual meeting of central bankers and economists.

That happens every year in, uh, in Wyoming. This is a very important meeting because oftentimes it's seen as the one where the fed chair sort of lays out the direction for monetary policy for the next couple of months, if not even longer. This one was being very closely watched, given the sort of back and forth he'd been having with President Trump.

How did it go for him and, and what did we learn?

I think about went about as well as he could have hoped, both on the substance side. Uh, I, you know, predicted like many economists did, that he would open the door to a September rate cut. I think he opened the door big time to a September rate cut using that language that policy may need, you know, to be altered or whenever his exact line was there.

But using that phrase, may need to change. I mean, that is about as clear cut as the Fed. Gets in terms of signaling, [00:16:00] very, very likely to happen in September. I think what got a lot more interesting is what was he signaling? Anything beyond September. Uh, my first read of the speech listening to a reading over the first time was very much that this was committing almost.

Certainly to September. Now, nothing's ever totally certain, but seeming like on that path and then really trying to pour cold water on the notion that there would be a ton war cuts the rest of the year, really trying to say it'll be data dependent. We still gotta watch the inflation effects. But as I went back through and read it again, what stood out to me, Elon, and I'm curious what stood out to you, but beyond emphasizing the downside risk of the labor market, he really walked through his view.

Of what could potentially cause the tariff driven inflation to become long lasting inflation. And the two or three things he outlined, he really said he doesn't think it's likely it's going to turn into the crisis. So that to me was really [00:17:00] interesting and does hint more to a, a dovish sound when you look at it again than my initial read of, oh, this sounds more hawkish after September.

And that's how I see it. But again, a lot can change week by week. Just look at what happened after the July jobs report.

Yeah, I think that's a, a good point. Sort of what is the long-term trajectory and that question of tariffs, which you've mentioned a couple of times now, and I, and I wanna pick up on that, is also really important, not just for what happens to monetary policy, but al obviously also what happens with individual families and households.

There was another kerfuffle between Trump and, and economists when Goldman Sachs released a forecast stating that consumers would end up paying about two thirds of the cost of tariffs, essentially that this would be passed on down to ordinary American households. Obviously that's not something that Trump wanted to hear.

They stood by their assessment, but you know, this question of who actually is gonna pay the tariffs [00:18:00] and how hard are they gonna bite, I think seems to be the question that, uh, the, the economic growth that we have enjoyed over the past few years is really hinging on.

Yeah, that was a great analysis. All right.

I wish I had done it. The Goldman Sachs one you've referred to, so saying about 20% of the tariff costs were passed through in June and that that could rise to 70% almost or two thirds by October. I would say their direction is right. I don't know that their magnitude is quite there. And the reason I would say that is I've come to buy into the belief.

People are calling it sneak deflation, and I think that's true. You know, as the Navy Federal Credit Union, we have 14 million members, many of whom are middle class, of the middle class. Some have served in the military, others are the families of military members. And uh, our largest presence is in the south and southeast and southwest of the United States and, and as well as outside dc.

And I can tell you that a lot of people are maxed [00:19:00] out. They're, um, now that doesn't mean they're totally falling behind and delinquent, but what I mean by that is they don't have a lot of extra room in their budgets. And I think that's why you see the Walmarts of the world, the Home Depots of the world, they're talking about, yes, they're going to need, need to raise prices, but they're not talking about passing it all through or passing it through on all their goods because they know the same thing that I'm seeing that.

Middle class, certainly lower income consumers are already tapped out and, you know, they'll move from the brand name laundry detergent down to a generic. They will forego an item if it's too expensive. And, you know, try to substitute it with something else or simply avoid buying it for a few months until it's really on deep discount.

And so, um, so that's where I think the sneak ation, that brands are trying to pass it through in 50 cent increments or $1 increments, you know, hoping that people won't totally. Back away from their products. You know, it's a very [00:20:00] delicate balancing act, which is very different than 2022. Mm-hmm. In the 2022 inflation surge, you know, people's, they still had their excess savings, they had those stimulus payments.

You know, there was a huge wage growth surge going on. And I'm not saying people love, they obviously hated inflation, but they had, we could see it in their budgets. They had room to absorb higher prices. That is not really the case right now.

And in some cases that that extra padding in their budgets might have helped to drive inflation because they were continuing to spend continuing to, uh, there was ongoing demand and so prices couldn't move out.

Exactly.

I, I love that term, sneak deflation because I, I do think that what we've heard from our clients as well is that companies are being so cautious in if and how they pass through those price increases to consumers from a reputational standpoint, as well as from an operational standpoint.

There's a lot of risk with doing it just all the way around with all your different stakeholders. [00:21:00] Another term that you've used in, in your previous columns is this idea of a KS shaped recovery. Explain to us what that is.

Yes. Basically pivoting off our last point, it. One exception to what we've just been talking about is the top 20% of Americans.

So, you know, this is people earning, let's, it's about 1 40, 100 40,000 or above, give or take. You know, as some people point out, that doesn't make you super rich, particularly in the DC area, but you know, you're certainly well enough off to do discretionary spending. And so we see in our data almost all of our.

Growth year over year in spending is coming from families earning or households earning $170,000 or above. And I, you know, I wrote this piece in the Washington Post that talks about the K shape and how different conditions are for the bottom 80, not just, you know, the bottom third, but we're talking about the bottom 80%.

The middle class and the lower income consumers , versus the top 20% [00:22:00] who continue to spend. And you could even see in that brand data you were talking about, the big story earlier in the summer was how the Chase Sapphire Reserve, whatever the fancy Chase Sapphire credit card, you know, they had hiked.

They actually hiked their annual fee and then Amex turned around and did the same for their prestigious card, and now Citigroup just introduced, you know, the maximum card or whatever and what were they doing because they know that the top 20%, just like we're seeing, is still growing their spending. And they want to be more exclusive.

They want to be in these more exclusive clubs, um, in a way that the bottom 80% is now spending just in line with inflation. Or we could see, for instance, in the Amazon in the Amazon Prime Sale this July, that the um, number, the volume was going up. We saw more transactions 'cause it was over several days.

But the average spend. Was the same or lower than last year, which suggests a lot of people were [00:23:00] not splurging, they were buying a lot of basics on sale.

People ask me like, hasn't it always been a kha economy? And I think they're kind of right.

But again, it was very different. For 2021 to 2023, you saw that revenge spending era across the income spectrum. You saw the higher. Account check, checking and savings account balances across the income spectrum. And what's different now is due to inflation, due to some of the, I call it frozen labor market dynamics.

The last few last year, two years, depending upon how you look at the data, you've seen that divergence really return between the fortunes of the top versus the bottom 80%.

Heather, I wanna ask you about. Your role now you're referencing some of the data that you get to see now as Chief Economist at Navy Federal Credit Union.

Tell me more about the type of analysis that you do, and I guess the unique [00:24:00] perspective that you have in your current position.

It's really exciting. I, I feel like as a journalist, I was known for someone who believed that you needed to get out from behind the computer screen and behind calling the experts, and you really needed to travel the country and understand what was going on and why people were so frustrated and what the experience on the ground is.

Uh, or why things are more nuanced than often a poll or whatnot, would it suggest? And now I feel very fortunate part of my drive to come to Navy Federal Credit Union, it's the largest credit union by far, 14 million members. And it's really, I see it as us as the voice of the middle class. I mean, I love, you know, look, there are good people who work at Goldman Sachs and JP Morgan and Chase, but that's not who you think about when you think about the middle class.

And so with our data that we have, you know, we can see things like how many people are still getting their direct deposits every week or every other week from their job. You know, we have a [00:25:00] gut check on the employment data that's under such a microscope right now, and so much debate about. How does it need to change?

You know, we can see a lot of that in real time or what we were just talking about. We can see, of course, so many consumer trends that are going on. Uh, you know, almost in real time what people are spending on, what people are different income levels or, or parts of the country are spending on, and how they're spending patterns compared to prior years.

One of the interesting trends that I've seen, I also listen to calls. You know, we track and use AI to track. Phone calls now, what people are calling in about and what's going on. And I think what's been really stood out to me is something that I've called Job downgrading. And some of that is people who maybe used to work at a salaried job at say, um, a federal government role and now they have had to take a lower paying job.

But a lot of it is this Elon, which I didn't realize until I was listening to these calls. It's people who are not getting [00:26:00] as many hours at work. They used to count on particularly overtime if you're a working class person. Overtime, when you get paid time and a half, if you're a, a nanny, if you're a home health aide, you know, if you work at at in fast food, like working time and a half overtime is where you really make your money and.

They're not getting those, they're not getting more than 40 hours. Their management is, is almost managing them to ensure that they don't. And that's a big shift and it really hurts a lot of people's income. And so, and you can see it in the federal data that. The average work week hours, work week has gone down a little bit, but it's, you know, it's really powerful for me to hear these stories from the front line of our, some of our members who are experiencing this.

And it's really, um, impacting their ability to either pay their bills or to have the financial security and freedom that they were, you know, they had maybe a year or two ago when times were better.

What would you consider your overall outlook [00:27:00] for the economy over the next year might be? Especially from, again, the vantage point of the folks that Navy Federal serves and the the people that you hear calling in on a daily basis.

It's definitely gonna be tough for the middle class. I am of the view that we probably, I think the US economy will avoid a recession, but I don't think that means there's no pain. Um, and we've been talking a lot about middle class, bottom 80%. As we were saying, it's very clear that prices will go up.

You can debate how much, how fast, but over the course of the next several months, the prices will be up. The, a lot of people are worried about jobs and as we were just talking about, they're already seeing some pullback in their hours that they're working. So that's impacting income. So yeah, real incomes are getting squeezed.

There's no other way to say it in the next few months. And at the same time, a lot of those government supports and, and aid programs are being scaled back, and that will continue into next year. Um, [00:28:00] on the PU side, I do, I am hopeful that we're going to get. I, I believe we're gonna get a September 25 basis point rate cut.

I think we'll get another one in December. Um, I'm hopeful that 2026 could finally be a year where the mortgage rate at least briefly gets to 6% or maybe even below 6%. And we finally, finally get out of this housing recession. Uh, it's still gonna be challenging environment to buy a home for the middle class, but, um.

There could be some hope for 2026 for people who've really been waiting for a more affordable situation.

Well, Heather, your insights and analysis both at Navy Federal and uh, in the Washington Post are gonna be so important for us to help navigate and understand the uncertain period that lays ahead of us.

So thank you so much for joining the podcast. We really appreciate it.

Thanks for having me, and thanks for being a guiding light yourself in journalism and now on the PR side.

Oh, thanks. To our [00:29:00] listeners, please remember to like and subscribe wherever you listen to your podcast. You can follow us on X at Penta grp, and on LinkedIn at Penta Group.

I'm your host, Ylan, and as always, thanks for listening to What's At Stake.