'He won't like the results': Krugman explains how Trump's Fed takeover will backfire

04 September

Economist Paul Krugman at FIDES 2023 in Rio de Janeiro, Brazil on September 25, 2023 (Image: Shutterstock)

President Donald Trump continues to angrily attack U.S. Federal Reserve Chairman Jerome Powell and Fed Gov. Lisa Cook (who he wants to fire) over interest rates, which he insists are much too high. Trump would like to see the Fed lower interest rates a full three percent — a move that many economists, including Paul Krugman, believe would be terrible for the economy.

Interest rate cuts, economists say, are a tool to be used during a recession — and the United States isn't in a recession.

In a September 4 column for his Substack page, Krugman explains why Trump's economic policies — including tariffs and attacking the Fed's independence — could ultimately lead to the very thing he bitterly opposes: Higher interest rates.

"If Trump does succeed in firing Cook, it would be a step on the road toward a fully Trumpified monetary policy," Krugman explains. "What would happen if Trump gained control of the Fed? He would be able to push through large cuts in the Federal funds rate, the short-term interest rate on overnight loans banks make to each other. And I mean large: he's been talking 300 basis points. We have, in the past, seen rate cuts that big, but only in the face of serious recessions. Trump, however, insists that the U.S. economy is booming, and a cut that big in the absence of a recession — and with inflation both above target and set to rise due to tariffs, deportations and surging electricity prices — would be unprecedented."

The former New York Times columnist continues, "Standard economics says that a big Fed funds rate cut in the absence of a severe economic slump would be inflationary. It would also damage the Fed's credibility — investors' belief that it will do what is necessary to fight future inflation. Eventually, however, inflation would force even a Trumpified Fed to raise rates."

If Trump does succeed in destroying the Fed's independence, Krugman notes, "short-term interest rates" would fall, but the "Trumpification of the Federal Reserve," he says, would make "long-term rates" much higher.

"Whatever he's thinking," the liberal economist writes, "if he succeeds in trashing the Fed's independence, he won't like the results. He might succeed in pushing short-term rates down for a while. But the interest rates that really matter to people's lives are long-term — like mortgage rates. And Trumpifying the Fed, thereby destroying its credibility, will send long-term rates higher — maybe much higher. MAGA!"

Paul Krugman's full SubStack article is available at this link.

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