Trump, the Fed, and a Brewing Economic Storm: An AI Perspective

A recent Bloomberg column by Clive Crook suggests that the Trump administration's policies have abandoned three key US economic principles, potentially leading to a perfect storm of inflation and a debt crisis. Let's analyze this situation further.

Trump's Departure from Economic Principles

Former US President Donald Trump and the Republican-controlled Congress have abandoned two of the three principles that have guided US economic policy for decades: promoting international trade and maintaining at least minimal fiscal control. Now, the third principle—delegating monetary policy to an independently operating central bank—is also under threat.

The Risks of Trump's Economic Policies

Each departure from the prior consensus on Trump's policies (trade, budget, and monetary policy) is destructive in itself, but the combination of the three raises the risk level significantly. Just as markets are worried about tariff-driven inflation and soaring public debt, depriving the Federal Reserve of power will sooner or later lead to a perfect economic storm.

Inflation and Public Debt Default

Achieving partial public debt default through inflation is no longer a distant possibility but a reasonable, even likely, outcome. This implies "fiscal dominance," where the government plays a dominant role in macroeconomic management through fiscal policy. Once the market anticipates this, it will become self-fulfilling—expecting inflation and long-term interest rates (which the Federal Reserve cannot directly control) to soar, and in this case, suppressing inflation requires high unemployment rates and drastic fiscal austerity.

Powell vs. Trump

Federal Reserve Chairman Jerome Powell explained why current policy interest rates should be maintained at a moderately restrictive level of 4.25%-4.5%: "Inflation is still slightly above the target, and tariffs may soon push up prices, and the unemployment rate is low, so it is best to be cautious and wait and see." But Trump immediately demanded a 2.5 percentage point interest rate cut, not politely dissenting, but attacking Powell with sarcasm and insult.

The Fed's Independence at Stake

Although the Federal Reserve insists on focusing on its mission and refuses to engage in political battles, Trump's unsettling hostility has damaged its freedom of action. Although Powell has not been fired, his term will end next May, but Trump is already preparing to appoint a successor loyal to him.

What Can the Fed Do?

The truth is, there is little the Federal Reserve can do. A government determined to direct the central bank will eventually get its way through appointments and political pressure. The Federal Reserve's "independence" is a custom rather than a legal (let alone constitutional) provision, and American politics in the past few years has proven that customs can be arbitrarily abandoned. However, the Federal Reserve can still take two steps to resist the impending reduction in "independence" to avoid being too late.

Internal Unity

First, internal unity should be prioritized: Federal Reserve policymakers should be united, emulate Powell's polite and restrained attitude, and avoid showing pro-Trump or anti-Trump positions. Analysts are looking for signs of division—two Federal Reserve governors, Christopher Waller and Michelle Bowman, recently mentioned that they may support an interest rate cut next month, which is contrary to Powell's position, although they were previously considered hawks. Regardless of whether their views are correct now or not, siding with the White House against Powell seems unhelpful, and if they believe in the value of the Federal Reserve's "independence," why not remain silent at this moment?

Return to Rule-Based Monetary Policy

Another way is to restore a simple "rule-based" monetary policy as a starting point for interest rate decisions (which is usually used as a tool to determine the end of interest rate decisions in ideal circumstances), such as linking the policy interest rate to actual and expected changes in nominal GDP, or the "Taylor rule" and its variants (linking actual and target inflation, and the unemployment gap). There is no need (and should not) for these rules to determine the interest rate, but they can create a basic framework, organize discussions, and restrict excessive sudden and unpredictable shifts in policy, such as "immediately cut the interest rate by 2.5 percentage points."

Conclusion

Faced with such an arbitrary and reckless US president, the Federal Reserve's unity and more prudent role in guiding public opinion will have a limited impact. The era of improving communication and rule-based policymaking seems to have ended, and the era of Federal Reserve independence is coming to an end, and people had better get used to it.

Analysis

AI Podcast: Trump, the Fed, and a Brewing Economic Storm

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