{"id":339924,"date":"2025-12-12T07:15:09","date_gmt":"2025-12-12T07:15:09","guid":{"rendered":"https:\/\/www.newsbeep.com\/ca\/339924\/"},"modified":"2025-12-12T07:15:09","modified_gmt":"2025-12-12T07:15:09","slug":"the-sleeper-issue-that-could-destroy-the-economy","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/ca\/339924\/","title":{"rendered":"The Sleeper Issue That Could Destroy the Economy"},"content":{"rendered":"

\"\"<\/a>Federal Reserve Chair Jerome Powell. (Photo by Alex Wong\/Getty Images)<\/p>\n

THERE ARE MANY ITEMS on President Trump\u2019s agenda that are hurting the U.S. economy: the pointless trade wars, the socialization<\/a> of the private sector, the mass deportations, and much more.<\/p>\n

But in the long run, the most damaging policy of all might be one that\u2019s gotten scant attention, at least from non-finance-nerds: Trump\u2019s quest to crush the Federal Reserve. If Trump succeeds, he may doom the United States to high inflation for years, if not decades, to come.<\/p>\n

Bullying the Fed has long been one of Trump\u2019s favorite pastimes. Way back in 2019, he called Jerome Powell, the Fed chair whom he had appointed the year before, an \u201cenemy<\/a>.\u201d He\u2019s continued the broadsides during his second term, repeatedly musing about firing Powell\u2014including earlier this year. It got press coverage at the time, due to the resulting market wobbles<\/a>\u2014and a truly awkward visit Trump made to the Fed headquarters as some sort of intimidation tactic. But the firing never came. And when the threats stopped, most of the media moved on.<\/p>\n

They shouldn\u2019t have.<\/p>\n

The threats to Fed independence have continued, and got darker this week. We may now be at an inflection point, as the Trump administration tacitly threatens to purge not Powell but other officials who set interest-rate policy. If he\u2019s successful, Trump could seize direct control of the money supply and turn America into Venezuela.<\/p>\n

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LET\u2019S START WITH THE BASICS. Why does the central bank need to be politically independent in the first place?<\/p>\n

The answer has to do with political incentives. If politicians control interest rates\u2014and therefore the supply of money sloshing around the economy\u2014they will always have an incentive to reduce them. That\u2019s because doing so would stimulate the economy. If borrowing is cheap, that helps consumers and businesses feel richer, which encourages them to spend more. This creates a sugar rush, which in the near term can feel good. Especially if you\u2019re the sitting president.<\/p>\n

In the long run, though, overstimulating the economy can be dangerous. It fuels inflation. And the medicine necessary to cure that high inflation (higher interest rates) is painful. Voters hate it. So politicians are reluctant to administer it, which can lead to more and more price growth.<\/p>\n

That\u2019s why you want the people in charge of setting interest rates to be insulated from near-term political pressures. If they\u2019re focused on the long-term health of the economy, rather than the next election, they\u2019ll be more willing to play bad cop and \u201ctake the punch bowl away<\/a>\u201d before the collective party gets out of hand.<\/p>\n

There\u2019s a lot of empirical<\/a> evidence<\/a> bearing this out. Countries with more independent central banks tend to have much better (i.e., lower) inflation outcomes. Likewise, there are plenty of examples of countries where politicians seized control of the money supply and decided to keep that delicious punch flowing. Venezuela, Argentina, Turkey, and pre-Euro Italy come to mind.<\/p>\n

But you don\u2019t need to venture very far geographically for a cautionary tale. This same thing happened right here in the United States, when, in turn, Lyndon Johnson and Richard Nixon each leaned on the Fed to keep interest rates low. You may recall the painful stagflation that resulted in the 1970s. But if you\u2019re too young, ask your parents about it.<\/p>\n

Powell certainly remembers it.<\/p>\n

At a public event in Texas<\/a> last year, a week after the 2024 election, I interviewed Powell and asked some awkward questions about Fed independence. One of my questions was whether we learned anything from prior episodes in which the Fed was seen as less independent. Here was his response:<\/p>\n

If you go back to the period of the high inflation\u2014which I\u2019m old enough to remember, it was during my college years\u2014and basically, the public kind of lost faith that the Fed would restore price stability. And, you know, the cost was a decade of very high and very volatile inflation, quite difficult business conditions, extremely difficult for people on a fixed income. . . . We\u2019ve seen it here in the United States in the 1970s actually, and it\u2019s not a pretty picture.<\/p>\n

To his point, a recent working paper<\/a> by a University of Maryland economist quantified how much political pressure various presidents placed on their Fed chairs based on daily records of their interactions and how long they lasted. The paper found that if a current president increased political pressure on the Fed by half as much as Nixon did, even for just six months, it would raise the U.S. price level by 7 percent over the next decade.<\/p>\n

In other words: If Trump (or some other future president) took a page out of Nixon\u2019s playbook, we should all expect to be paying a lot more on everyday purchases.<\/p>\n

But at last year\u2019s event, Powell assured the audience that lawmakers today knew all about this risk, and would have the Fed\u2019s back:<\/p>\n

So you know, I think this is very widely . . . understood and supported. You know, I\u2019ve spent a lot of time on Capitol Hill. And I think where it really matters, on both sides of Capitol Hill, the Senate and the House, in both political parties, there\u2019s a broad understanding that an independent central bank is very important in just serving the public as best we can. We\u2019re not perfect, everyone makes mistakes, but you\u2019ll get the best results if you have people who are just focused on that task and separate from politics.<\/p>\n

He should not have been so confident.<\/p>\n

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IN HIS FIRST TERM, Trump threatened to put a few<\/a> nutjobs<\/a> on<\/a> the Fed<\/a>, but ultimately lawmakers in his own party stopped him. So maybe that\u2019s what Powell was thinking of when making those comments last year.<\/p>\n

Even so, Trump has continued to harass Powell since returning to office. The president has given the Fed chair cutesy nicknames<\/a> and accused him without evidence of mismanaging the Fed headquarters construction project<\/a>. Trump has mostly stopped threatening to fire him, at least. Which makes sense: Powell\u2019s term as Fed chair ends in May 2026 anyway, so why bother? Firing him without cause would also be unlikely to survive a court challenge. (More on this in a minute.)<\/p>\n

Meanwhile, Trump has been hunting for a successor for Powell who would be more pliable, and more interested in cutting interest rates. In fact, when asked this week if cutting rates was his \u201clitmus test\u201d for the next Fed chair<\/a>, without hesitation Trump declared, \u201cYes.\u201d<\/p>\n

The widely reported favorite to be Trump\u2019s nominee to replace Powell is Kevin Hassett<\/a>. You may know Hassett as the affable, sycophantic director of Trump\u2019s National Economic Council, whom JVL once described as \u201cConservatism\u2019s Invincible Ignoramus<\/a>.\u201d Econ-watchers generally know him for his egregious chart crimes<\/a>, the most infamous being his \u201ccubic model.\u201d That chart predicted, in May 2020, that COVID-19 deaths would drop to zero<\/a> within two weeks. (He had misused a basic Excel function.)<\/p>\n

That embarrassing incident sums up Hassett pretty well: He\u2019s a guy who relies on the trappings of academia to reverse-engineer whatever result Trump wants, but the entire exercise is usually garbage. That reputation, in turn, explains why bond investors recently warned Treasury Secretary Scott Bessent that they didn\u2019t want Hassett helming the Fed<\/a>. According to the Financial Times, investors worry he won\u2019t be independent.<\/p>\n

That\u2019s likely to be an issue with whomever Trump chooses for the top job, though. And not just for the top job, either.<\/p>\n

The Fed chair is just one position on a rotating committee that sets interest rates; Trump would need a majority of that committee under his thumb to get the easy-money policies he wants. So he has simultaneously pursued other avenues for reshaping the central bank.<\/p>\n

For example, Trump appointed the chair of the Council of Economic Advisers, Steve Miran, to an open Fed Board slot this fall. To be clear, lots of former<\/a> CEA<\/a> members<\/a> have gone on to serve on the Fed. What\u2019s unusual here, though, is that Miran assumed the Fed job without resigning from his political White House job. Instead, he went on \u201cunpaid leave<\/a>\u201d from the White House while still being employed there.<\/p>\n

So there\u2019s not even a pretense of independence, and yet Senate Republicans still pushed Miran\u2019s confirmation through.<\/p>\n

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Trump has also weaponized the state against other Fed officials. He attempted to fire Fed governor Lisa Cook in August, for instance, after claiming that she had committed mortgage fraud. She has denied the allegations, and she continues to serve as her case works its way<\/a> through the courts.<\/p>\n

Separately, the Trump administration claims it doesn\u2019t need to cite a \u201ccause\u201d (whether mortgage fraud, or any other misbehavior) when removing independent agency leaders. This would overturn a 90-year-old precedent<\/a> regarding independent agencies. This week the Supreme Court heard oral argument<\/a> for a case challenging Trump\u2019s decision to fire a member of the Federal Trade Commission<\/a>, which certainly seemed like a test case for firing Fed officials, too. In fact, Justice Brett Kavanaugh expressed concern about how the Court could rule in Trump\u2019s favor on the FTC firing without also compromising Fed independence (which he seemed loath to do).<\/p>\n

Finally, there\u2019s the sneakiest thing, which has gone almost entirely under the radar: the plot to undermine the regional Fed bank presidents.<\/p>\n

The Fed has an unusual governance structure<\/a>. The rotating committee that votes on interest rates draws from twelve regional Fed bank presidents from around the country<\/a>. These regional Fed presidents are chosen by local business leaders and other stakeholders, but must be approved by the Fed board in Washington, D.C. Usually this approval is pro forma. I have been unable to find a single case where the Fed Board vetoed a regional pick. (Tell me if I\u2019ve missed one.)<\/p>\n

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But all twelve regional bank presidents are coming up for renewal in February, and Hassett and Bessent<\/a> have both coyly hinted that a purge may be coming.<\/p>\n

The pretext would be a new, bogus, long-term residency requirement that Bessent proposed, which would require Fed presidents to have lived in their bank\u2019s region for at least three years before taking the job. If this rule were already in place today, nearly all of the Fed presidents would have been disqualified from their appointments. (These are big jobs, and usually involve a national talent search.) Hassett echoed this idea during an exchange<\/a> on Fox Business last Friday:<\/p>\n

Kevin Hassett: It wouldn\u2019t require anybody to go in and fire anybody who\u2019s there now, but going forward, being respectful of the original design of the Fed, which helps provide the independence you need because you\u2019ve got regional variance across who\u2019s actually making the decisions. I think it\u2019s a good idea.<\/p>\n

Maria Bartiromo: Would it derail the expected February approval of the twelve Regional Reserve Bank presidents to five-year terms?<\/p>\n

Hassett: That\u2019s something I\u2019ve not discussed with everybody yet.<\/p>\n

This would be the way Trump co-opts the Fed. And we all would pay the price for it\u2014quite literally.<\/p>\n

Leave a comment<\/a><\/p>\n

\u2014 According to a new court filing, the Trump administration has a six-page list of banned words and phrases that Head Start locations are forbidden from using when describing their programs. Among the censored terms: \u201cdisability,\u201d \u201crace,\u201d \u201cwomen,\u201d \u201ctrauma,\u201d and \u201cGulf of Mexico.\u201d You can find the full list here<\/a>.<\/p>\n

Note that these bans have real consequences: For example, a Head Start program operated by a tribe on a Native American reservation was told not to prioritize tribal kids, in likely violation of the Head Start Act. The program director also can\u2019t do training on trauma-informed instruction, or to support kids with autism, according to the court filing.<\/p>\n

\u2014 Days after Trump was awarded the totally-real-and-not-made-up FIFA peace prize<\/a>, his DOJ moved to drop charges in a FIFA corruption case<\/a>.<\/p>\n

\u2014 John Deere has warned that Trump\u2019s tariffs are backfiring on American farmers, per the Financial Times<\/a>. The tractor manufacturer has had to cut production (\u201cbuilding half as many tractors this year as we did two years ago\u201d) and workers, and says it is likely to cut more jobs in 2026.<\/p>\n

\u2014 Paramount\u2019s commitment to Rush Hour 4 may be paying off! Well, that and Jared Kushner\u2019s involvement. Trump appears to be openly helping Paramount\u2019s hostile takeover bid<\/a> for Warner Bros. Discovery.<\/p>\n

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