The Hidden Threat That Could Cripple America's Economy
President Trump's agenda is packed with policies that are detrimental to the US economy, from pointless trade wars to the socialization of private sectors and mass deportations. But lurking in the shadows is an issue that could prove even more destructive: Trump's relentless attack on the Federal Reserve.
Trump's obsession with dominating the Fed is not new. In 2019, he labeled Jerome Powell, the Fed chair he appointed, as an "enemy." This hostility continued into his second term, with Trump repeatedly considering firing Powell, causing market jitters and an awkward visit to the Fed headquarters. While the firing never materialized, the threats alone were concerning.
The situation escalated this week as the Trump administration indirectly threatened to remove not just Powell but other officials involved in setting interest rates. If successful, Trump could gain direct control over the money supply, potentially turning the US into another Venezuela.
The central bank's political independence is crucial. When politicians control interest rates, they're tempted to lower them to stimulate the economy, creating a short-term sugar rush. However, overstimulation can lead to dangerous inflation, and the remedy for this is often unpopular with voters. Independent central banks, insulated from political pressures, are more likely to make tough decisions to control inflation.
Empirical evidence supports this. Countries with more independent central banks tend to have lower inflation. Conversely, when politicians control the money supply, inflation can skyrocket. Venezuela, Argentina, Turkey, and pre-Euro Italy are cautionary tales.
The US has its own history with this, as Lyndon Johnson and Richard Nixon pressured the Fed to keep interest rates low, leading to painful stagflation in the 1970s. Fed Chair Jerome Powell is well aware of this, having lived through that era.
A recent study quantified the impact of political pressure on the Fed. It found that if a president exerted half as much pressure as Nixon, even for six months, it could raise the US price level by 7% over the next decade. Trump's potential emulation of Nixon's tactics could significantly impact everyday purchases.
Despite this, Trump has continued to harass Powell, giving him nicknames and making unsubstantiated accusations. He has also been searching for a more compliant Fed chair who would cut interest rates. The frontrunner for this position is Kevin Hassett, known for his controversial economic predictions and his close alignment with Trump.
Hassett's reputation for bending economic models to fit Trump's desires has raised concerns among bond investors, who have warned the Treasury Secretary about Hassett's potential lack of independence.
Trump's influence extends beyond the Fed chair. He has appointed Steve Miran, the chair of the Council of Economic Advisers, to the Fed Board without requiring him to resign from his White House position. This blurs the lines of independence, yet Senate Republicans pushed for Miran's confirmation.
Trump has also targeted other Fed officials, attempting to fire Fed governor Lisa Cook over unproven mortgage fraud allegations. The administration's stance on removing independent agency leaders without citing a cause further threatens Fed independence. This issue reached the Supreme Court this week, with Justice Brett Kavanaugh expressing concerns about the potential impact on Fed autonomy.
Additionally, there's a covert plan to undermine regional Fed bank presidents. The Fed's governance structure includes twelve regional Fed bank presidents chosen by local stakeholders and approved by the Fed board. Trump's team has proposed a new residency requirement that, if applied retroactively, would disqualify nearly all current Fed presidents. This could be a strategic move to reshape the Fed's decision-making body.
The implications of Trump's actions are profound. If he succeeds in controlling the Fed, it could lead to high inflation for years or even decades. This hidden threat, often overlooked, could have devastating consequences for the economy. But here's where it gets controversial: is Trump's approach a calculated strategy or a reckless gamble? Share your thoughts in the comments below.
