Trump heading for a brutal humiliation on Wall Street: Nobel economist

President Donald Trump spent months angrily berating U.S. Federal Reserve Chairman Jerome Powell for not lowering interest rates as much as he would like, and the Trump-era U.S. Department of Justice (DOJ) even targeted Powell for a federal investigation. Financier Kevin Warsh, Trump's nominee to replace the outgoing Powell, is scheduled to be sworn in as Fed chair this Friday, May 22. But according to liberal economist Paul Krugman, Trump has placed Warsh in a very difficult position — and in doing so, is setting himself up for a brutal humiliation on Wall Street.

Trump's war in Iran, Krugman emphasizes in a Substack column, is causing oil prices to soar — which is leading to rising prices for a variety of goods and services. As a result, Krugman says, Warsh will be under pressure to do the exact oppose of what Trump wants him to — that is, raise interest rates instead of lowering them.

"Investors are responding to the fact that the current rise in inflation looks a lot like the rise in inflation during 2021-2023, which was the result of supply chain disruptions," Krugman warns. "Back then, the Federal Reserve was compelled to raise short-term interest rates to curb inflation. Longer-term interest rates, which largely reflect expected future short-term rates, followed suit. Now, we're seeing a remake of that movie, with one big plot difference. The inflation spike of 2021-22 was overwhelmingly the result of factors outside Joe Biden's control — surging demand as the world recovered from COVID and (Russian President) Vladimir Putin's invasion of Ukraine."

Krugman continues, "The current inflation surge, by contrast, is all Trump, caused by his self-defeating tariffs and the gratuitous debacle in Iran. And the inflation outlook is worsening by the day as the Strait of Hormuz, through which about 20 percent of the world’s supply of oil normally passes, remains closed.

The "markets," according to Krugman, "are now waking up to the reality of the debacle" — and they are now "virtually certain that rates will either rise or at best stay the same."

"Now, the pain will be greatly intensified by soaring interest rates on mortgages, car loans, and more," Krugman argues. "And rising rates tilt the economy toward a slowdown, possibly even a recession. So I'm sure we'll see many ALL CAPS posts from Trump demanding drastic interest rate cuts NOW NOW NOW. But what the markets are telling us is that in the face of rising inflation, they strongly expect that most members of the Fed's monetary committee will vote either to raise rates or at best to leave them unchanged."

The former New York Times columnist continues, "So, will Warsh start his tenure by being repeatedly outvoted, rapidly losing credibility within the institution he's supposed to run? Or will he, as Trump will surely see it, betray his master? All I can say to Kevin Warsh is, 'just deserts.' One thing is clear: The markets are finally waking up. And the economic and political fallout from Trump's decision to emulate his idol Putin by launching what he believed would be a short, victorious war is just getting started."