Recent months have seen the ebb and flow of a certain pattern: US President Donald Trump will take some objectively harmful action to the US economy, and the markets will crash. Seeing this, Trump turns to Jerome Powell, chair of the Federal Reserve, and demands he lower the Fed Funds Rate — the rate at which the Fed lends money to banks. And the steely-eyed Powell will say, “No.”
Trump wants to lower rates because doing so is an effective cash injection into the United States economy, stimulating activity and lifting the market. This, he believes, will make him appear successful. Powell wants to follow rigorous economic standards to set rates to carefully balance the Fed’s dual mandates of maximizing employment and maintaining stable prices.
He also wants to maintain the Fed’s independence from political pressure and, crucially, maintain the Fed’s appearance of independence from political pressure. If the markets believe that the central bank’s independence has failed in the US, it may become more difficult to sell US Treasury Bills, the United States’ sovereign debt. That is a problem in the fundamental sense that the US will have to pay more to borrow money, making it poorer — but it is an especially acute problem now because the US already has an enormous, $30-trillion pile of debt, which it has to periodically refinance.
If it is forced to refinance at higher rates because markets do not trust the US government anymore, then an ever greater percentage of GDP will be absorbed by the cost of interest, and, as the kids say, the United States will be cooked.
That dance takes us to now. Last week, Trump repeatedly intimated that he would like to fire Powell, and the market didn’t like it. On Monday, Trump provoked a crash by calling Powell “a major loser” on Truth Social. In response, Treasury Secretary Scott Bessent has reportedly voiced concerns with the risks of firing Powell to Trump, who seems, for now, to have acquiesced, stating Tuesday that he would not fire his Fed chair.
