Andrew Ross Sorkin Explains the DOJ Criminal Investigation of the Fed Chair

WALTER ISAACSON: Thank you, Christiane. And Andrew Ross Sorkin, welcome back to the show.

 

ANDREW ROSS SORKIN: Thanks so much for having me. 

 

ISAACSON: So, earlier this week, I wake up as I usually do to your Deal Book newsletter, and there was a sentence that sort of jolted me more than my chicory coffee. It was right after Fed Chair Jay Powell released a video saying he was under criminal investigation. And you wrote, “there are certain moments that deserve extra reflection. Today is one of them.” Why is this such a big deal?

 

SORKIN: You know, I think for the last year that we’ve watched this administration, we’ve seen all sorts of elements of what might be described as lawfare and questions about that. You know, there’s also been questions about the independence of the Federal Reserve for the last year as the President has made it clear that Jay Powell is his enemy and somebody he would like to fire and push out. And I think this was one of those moments, especially within the business world that was different. It’s been one thing, in the past in history, there have been moments when presidents have been quite critical, more than critical, publicly about the head of the Federal Reserve and the acts of the Federal Reserve. But this was different. This is the very idea of potentially prosecuting on a criminal basis the head of the Federal Reserve. And it comes at a moment when the public and the markets look at that and say that it appears to be a coercive act, which is to say, to force Jay Powell to lower interest rates or to otherwise leave from his term before his term is over. And I’ve long waited, thinking, is there a moment like this gonna even come? And by the way, when a moment like this comes, what is gonna happen next? Will political leaders, will business leaders stand up and say something?

 

ISAACSON: And have they?

 

SORKIN: It’s been interesting. There have been a number of folks who both in the Republican Party, in the Senate, that have broken with this president over this issue and done so publicly. All of the living former Fed chairs that have been in this role came out and condemned this action and this investigation and supported Jay Powell. Similarly, a number of former treasurer secretaries, including Henry Paulson, a Republican, said the same thing. And then most recently, we heard from Jamie Dimon, one of the most influential bank CEOs in America, publicly support Jay Powell, and the independence of the Fed as well. So I think you are actually seeing some voice to this, and not just some voice to this from the individuals themselves, but even the market has had a voice of a sort in so far as when this first became public on Sunday evening, the markets moved and did so negatively in reaction to it.

 

ISAACSON: When this happened in 2018 when Trump was saying, I’m gonna fire Powell, the markets moved a whole lot. Tell me though, what’s really happening now in the markets? It’s even going down a bit. Maybe Bitcoin or Gold is doing something, but are they really reacting?

 

SORKIN: Well, I think there’s a combination of things. One is there’s been a numbing, there’s been a numbing effect in terms of just so many norms that have been shattered. To some degree I think that people in the market don’t flinch the way they might have in the past. The other element is in part because we’ve seen such a vocal reaction, I think the markets have settled themselves and said, well, maybe in fact there won’t be a quote unquote prosecution of Jay Powell. There has been commentary from some senators, Republican senators in Washington, they may even hold up the next nominee from Trump to be the head of the Fed, the head of the Fed, unless this investigation ends in some kind of very quick way. So I do think the markets are taking some solace from that in the context of what does the independence of the Fed look like?

 

ISAACSON: Well, you said that some Republicans are pushing back and saying they may hold up nominees. The really big one is Thom Tillis of North Carolina. A few others, Senator Kennedy from my home state of Louisiana, others have said – but Tom Tillis was very strong. Let me read some of it, which is, “If there were any remaining doubt whether advisers within the Trump administration are actively pushing to end the independence of the Federal Reserve, there should now be none.” And he said, the credibility of the Justice Department is the one that’s in trouble and that he’s gonna hold things up. Do you think this means a dam maybe breaking, that this notion that Republican senators haven’t stood up to Trump might be ending?

 

SORKIN: I don’t know. This could be a very idiosyncratic moment. You know, Tillis is not running for reelection, in part because he’s fed up with what’s happened in Washington. And so he has potentially more license, if you will, than others to perhaps speak his mind. You know, there’s also been some reporting just in the past 24 hours from the Wall Street Journal and elsewhere that the President was putting pressure on Pam Bondi and other members of the Department of Justice to try to exact the kind of of cases and bring the kinds of cases, and do the work that he’s been pushing for and demonstrating his frustration about that. And some people have been led to believe that perhaps some of those conversations in fact, led to the beginning of this investigation in terms of subpoenas being sent and the like. 

 

ISAACSON: Let’s follow that up. You just said it may be the pressure. Was that what happened in this investigation with the US attorney who’s close to Trump?

 

SORKIN: I think we don’t know the answer yet. You know, thus far the president – and I should say this as clearly as he has said it – he says that he did not know about this investigation, that he had not spoken with the Department of Justice about this investigation and learned of it like everybody else. I cannot verify that. I do not know if that is the case, but I think it is clear that we’ve heard his public commentary about Jay Powell over these past months. And not just that, we’ve also seen and heard the kind of close relationship and back and forth he has had with different people who work within the Department of Justice. So I think there are still questions about, you know, what led to this, in truth and whether the president specifically said to his colleagues at the Department of Justice, please go do this. Or they felt pressure to do it to appease him. They may be one and the same in the end.

 

ISAACSON: Well, let’s be clear what Chairman Powell thinks. I mean, what he said was, “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on, based on our best assessment of what will serve the public, rather than following the preferences of the President.” So he’s pretty clear. And doesn’t it make sense that he kind of knows why this is happening?

 

SORKIN: Well, look, there’s two views of his decision to publicly release that video, which is really unprecedented for a Federal Reserve chair. One is that indeed, in fact, he very much believes that this is lawfare and that this is being used as a coercive effort to push him out early or to influence how he reacts. And there is another view that his decision to go public in such a way is to shape, perhaps, the narrative. And obviously, the president and the Department of Justice have suggested that they believe that they are bringing this case in good faith or this investigation, I should say, in good faith. They have said that they sent two letters or communications to the Federal Reserve – I believe those communications happened in December – asking for more information and did not receive any.

 

ISAACSON: Yeah. But I mean, this is just something about a construction of a building. This is not a criminal case that seems to make sense.

 

SORKIN: Well, that’s the thing. Look, there are lots of different avenues for the American public and Congress and others to hold the Federal Reserve and other institutions in the United States accountable, if you will, for spending. So if the issue is how are they spending the money clearly in this case, there is demonstrable evidence that it is something like $700 million over budget. If there was evidence that this was being misused and lied about, you don’t have to have a criminal investigation to find out more. You could hold hearings, you could have auditors go in, there are other things you can do. A criminal investigation is a very specific thing to do and carries enormous consequences.

 

ISAACSON: How do you think this might affect interest rates in the Fed, what it’s gonna do later in the month?

 

SORKIN: Oh, goodness. In truth, I actually think this is creating potentially more independence for the Fed, at least temporarily insofar that there could be a backlash. I think there are members of the Fed, and also by the way, other central bankers from around the world that have now come out in support of Jay Powell and this Federal Reserve. So the idea of trying to either kick him out or change his view, I think in fact will be strengthened to some degree. And not only was there an expectation that Jay Powell would leave his seat in May as the chair, but there was also the possibility that he would retire from the board entirely. He could stay on as a governor. And in fact, perhaps because of what’s just happened, it may be more likely that he does stay on for some period of time.

 

ISAACSON: Let me ask you the most basic question. Why shouldn’t the president be able to help decide what interest rates are? Why should the Fed be totally independent? Why shouldn’t we have some political control where we decide to hold the president accountable if there’s inflation?

 

SORKIN: I think in the end, history has demonstrated that you need to have an independent federal reserve, in part because they are setting interest rates and they need to be able to do so without fear of favor, without trying to get whoever’s in office elected by lowering interest rates temporarily or raising interest rates temporarily. And even more importantly than that, I would actually argue in a crisis, in a panic moment – having written about 1929 and having written about 2008 and even what the Federal Reserve ultimately did during the pandemic – oftentimes the Federal Reserve has to do things that are uniquely politically unpopular and, and unpalatable. The bailouts in 2008, I know there’s lots of debate about that, but ultimately, arguably it helped keep the country from really getting into a long depression. Similarly, during the pandemic, there was an effort to really throw money at the problem, which could have been politically unpalatable in that moment. And yet you need a federal reserve that’s willing to do things without fear that the President of the United States or any other politician is going to be trying to, you know, move the dials.

 

ISAACSON: In your book 1929, you have a truly wonder– you have a lot of wonderful characters, but one of ’em is Senator Carter Glass of Virginia, who helps create the Fed. Tell me about the compromises done that created the Fed and why that either makes it stronger or more vulnerable today.

 

SORKIN: Well, so one of the keys to the Federal Reserve was to have an important and central office in Washington, but was also to have regional offices around the country. So that Wall Street didn’t take over, didn’t have more power. That was critical, and the independence piece was also critical. And they were aware of that because they understood that there were gonna be decisions that at times were going to be politically unpopular. And when you really dig in and even think about the crash of 1929 and look at the fact that frankly, the Fed did not act, perhaps, the way they should have, one of the reasons for that, arguably, if you read some of the diaries and notes and memos of the members of the board during that period, was because of political pressure. Because the Federal Reserve was such a new entity born in 1913, still considered an experiment of sorts, there was a worry that if they actually raised interest rates to try to tamp down speculation that they could tip the economy over and they would get blamed. And not just that they get blamed, but that the entire experiment would be eliminated.

 

ISAACSON: Tell me about what we can learn from overseas. I know that the Turkish President has interfered with his central bank. Is that a warning sign for us?

 

SORKIN: There’s no question that there have been a whole number of instances where you’ve seen certain countries, some of which have been described as Banana Republics and others, where the, you know, the head of state effectively has tried to manage the economy and manage their central bank. And in some of those cases, you have seen massive inflation spikes, in part because the investor class says, this is not as trustworthy a borrower as we thought, given that the controls are not independent.

 

ISAACSON: Let me ask you something, a separate thing, which is the cap on credit card interest rates. How does that play into this? And is this causing Wall Street to have more agita? 

 

SORKIN: Well, this is a separate but very complicated issue. It comes against the backdrop of the watch word of the day in our economy, which is affordability. And the President of the United States really taking a page frankly, from the Democrats, in fact president Trump almost teaming up to some degree with Elizabeth Warren in this case, to suggest that banks should cap their credit card rates at 10% as a way to try to make things more affordable for Americans. So those that are not able to pay off their monthly bills are not being charged 15, 20 in some cases as much as 30 or more percent each month. Now there’s a battle going on here because while it sounds on the headline, oh, it’s gonna be capped at 10%, that sounds good. There are real questions in the marketplace right now, and a lot of what the banks are saying is, it could really eliminate or reduce the amount of credit that’s available to borrowers, which is to say that the banks may cut off certain customers because they would find them to be quote unquote unprofitable and couldn’t make the economics of those credit cards work.

 

ISAACSON: Well, all of this ties in, it seems to me, to sort of a more populous Donald Trump talking about affordability like Democrats have been doing. And that even comes to the question of corporate buying of housing. Is this all of a piece of a new Donald Trump?

 

SORKIN: Oh, I think that there’s a line running through all of these things. I think it’s the piece on credit cards. It’s trying to eliminate big private equity companies from buying, from buying homes and then turning around and trying to sell or rent them to individuals to try to keep prices lower there. Even an effort to eliminate or reduce the number of stock buybacks that take place in dividends in the country. So there is a move afoot that actually looks a lot, I mean, looks a lot like what some Democrats have supported for a very, very long time and is an interesting in terms of the timing ahead of the midterms

 

ISAACSON: And it’s all part of a populist piece. And do you think this will finally change President Trump’s relationship with the people you cover, the people in the backdrop of you right there, which is basically Wall Street, the markets, business and corporate America?

 

SORKIN: So that’s where I’m less clear. I will say, you know, in this moment where the Republicans control the White House, Congress and the Senate, there’s always a question of who is the governor, if you will, over the President of the United States. And from my vantage point, actually, the market has been perhaps one of the only real governors over the President. And I say that because if you remember last April, quote unquote liberation day, the day that the president announced his tariff plan, the bond market really reacted negatively and then he pulled back. Again in the fall, we had a similar situation. He talked about much higher tariffs for China. The market reacted and he pulled back. There are very few times and very few people on an individual level in Washington or elsewhere that seem to have forced the hand of the president the way the markets have.

 

ISAACSON: Andrew Ross Sorkin, thank you so much for joining us.

SORKIN: Thank you.