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Financial markets

Trump's War on the Federal Reserve: A Threat to US Economic Stability

Strategic Insights

— 2 min read

The ongoing conflict between Donald Trump and the Federal Reserve, culminating in the attempted firing of Federal Reserve governor Lisa Cook, highlights a deeper issue with US monetary policy. Trump's efforts to exert control over the Fed echo a broader pattern of presidential interference that has led to economic instability. A University of Maryland economist's research suggests that political pressure on the Fed increases inflation and has no positive effects on real economic activity. As Trump continues to push for lower interest rates, he risks derailing the independence of the Fed, which is crucial for maintaining global financial stability.

Key Takeaways:

  • Trump's alleged attempt to fire Lisa Cook, a Federal Reserve board member, is part of a wider pattern of presidential interference in monetary policy, dating back to the 1970s.
  • Cook has not been charged with any wrongdoing, and the Supreme Court has drawn the line at presidential interference at the Fed, leading her to file a lawsuit against Trump.
  • Trump's goal is to effectuate Cook's removal and replace her with a new nominee who would undermine the independence of the Federal Reserve.
  • University of Maryland economist Thomas Drechsel's research shows that political pressure to cut interest rates increases the price level strongly and persistently, leading to negative effects on real economic activity.
  • The same research estimates that an increase in presidential pressure on the Fed half as much as Richard Nixon imposed on Arthur Burns would lift prices by 7 per cent.
  • The alleged sacking of the director of the Centers for Disease Control and Prevention, Susan Monarez, further highlights the issue of independence in the American political system.
  • The Federal Reserve's independence is essential for maintaining global financial stability, and Trump's actions risk destabilizing the economy.
  • The spread between interest rates on 30-year and 10-year American government bonds is widening, indicating concern about the economy, which may be related to mounting American government debt, standing at a record $US37.3 trillion ($57 trillion).
  • Australian economist Justin Wolfers notes that Trump's ultimate goal may be to keep interest rates artificially low to keep interest payments on government debt low, which would lead to inflation, and possibly hyperinflation.

Statistics:

  • Inflation in the US peaked at 9 per cent in 2022.
  • Australia's inflation rate reached 7.8 per cent.
  • The Federal Reserve's key lending rate is set at 4.25-4.5 per cent.
  • The Fed's inflation target is 2 per cent, while the current inflation rate is 2.7 per cent.
  • American government debt stands at a record $US37.3 trillion ($57 trillion) and is growing.
  • The spread between interest rates on 30-year and 10-year American government bonds is widening.

Sources:

  • University of Maryland economist Thomas Drechsel
  • Monash University economist Zac Gross
  • Australian economist Justin Wolfers
  • Westpac chief economist and former RBA assistant governor, Luci Ellis
  • A University of Michigan economist, who knows Cook

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