Economists Warn of Risks from Trump's Attacks on the Federal Reserve

A Financial Times survey reveals economists are warning that financial markets have not fully priced in the risks posed by former President Donald Trump's attacks on the Federal Reserve, including higher inflation and a potential loss of investor confidence in U.S. Treasury bonds.

The former President's intervention in the world's most influential central bank has raised concerns about the Fed's ability to control inflation by setting interest rates. Many economists worry these attacks could lead to a permanent shift in the central bank's priorities, favoring employment and lower government borrowing costs over price stability.

Christiane Baumeister, an economist at the University of Notre Dame and a survey participant, stated that the Fed could become "a puppet of the government." Other participants described the future of U.S. monetary policy as "terrible," "chaotic," and "a disaster.""

Trump has escalated his attacks on the Fed since his second term, criticizing Chairman Jerome Powell for refusing to cut interest rates. The attacks culminated in the White House announcing its intention to dismiss Lisa Cook, a member of the Fed's Board of Governors. Cook has refused to resign and has vowed to fight the dismissal through legal channels, potentially setting a crucial test of the White House's influence over the central bank.

The Financial Times survey indicates a majority of economists believe these events have damaged the Fed's credibility. More than a quarter expressed concern that the central bank may be unable to fulfill its legal duty of setting U.S. borrowing costs without political interference.

Economists believe that weakening the central bank's independence could harm the U.S. economy, with some fearing higher inflation and a loss of confidence in U.S. Treasury bonds. Others suggest Trump's intervention in the Fed's operations could encourage similar attacks on other central banks worldwide.

While some believe financial markets have not fully factored in the risks of Trump's attacks on the Fed, there is a broad consensus that central bank independence is essential for economic and financial stability.

Additional Risks: It's important to consider that politicizing monetary policy can lead to poor long-term economic decisions. Independent central banks are often able to make difficult but necessary decisions for economic stability, while politically controlled central banks may be more prone to short-term decisions aimed at political gains. This can create instability and uncertainty in the long run.

Analyzing Potential Market Reactions

The financial markets' reaction to further escalations of political interference with the Federal Reserve's actions may include increased volatility in bond yields, currency fluctuations, and potential adjustments in risk premiums. Investors may demand higher yields on U.S. Treasury bonds to compensate for the perceived increased risk associated with political influence on monetary policy. Moreover, a loss of confidence in the Fed's independence could potentially trigger capital outflows and downward pressure on the U.S. dollar.