President Trump, who more and more is exhibiting alarming displays of incoherence and possible dementia, announced today that he is seeking to remove one of the leaders of the Federal Reserve. His game plan is somewhat transparent. He knows there’s a chance his tariffs will drive the economy into a ditch (that chance being about 95-99%) and so he’s setting up the Fed to blame them for not moving fast enough to lower interest rates.
President Trump’s justification for removing Fed Governor Lisa Cook is based on an allegation that she committed mortgage fraud.
I’m very glad to hear that mortgage fraud has risen to the level of job termination of federal officials. Congress should move immediately to examine every mortgage Donald Trump ever signed.
Long term, the issue of Fed independence is no joking matter. The dollar is the world’s reserve currency, we have the greatest economy in the world. But not by accident. An independent central bank is critical to a healthy capitalist economy.
Here’s a quick primer:
Why Fed Independence Matters:
- Monetary Policy Effectiveness: An independent Federal Reserve can make difficult but necessary decisions based on economic data rather than political cycles, allowing for timely interest rate adjustments and inflation control without regard to election timing or political pressure from either party.
- Credibility and Inflation Expectations: Markets and consumers trust that the Fed will maintain price stability over the long term when it operates independently, which helps anchor inflation expectations and makes monetary policy more effective at managing economic cycles.
- Protection from Short-Term Political Pressures: Independence shields the Fed from demands for easy money policies that might provide short-term economic boosts but create long-term instability, allowing for consistent policy frameworks that support sustainable economic growth.
Likely Market Outcomes if Independence is Compromised:
If markets lose confidence in Fed independence, several negative consequences would likely emerge. Bond markets would probably demand higher risk premiums, driving up long-term interest rates as investors price in greater uncertainty about future inflation and monetary policy consistency. The dollar could weaken significantly as international investors question the Fed’s commitment to price stability, potentially triggering capital outflows. Inflation expectations would likely become unanchored, making it much harder and more costly for the Fed to control actual inflation. Additionally, market volatility would increase as investors struggle to predict policy changes based on political rather than economic considerations, and the Fed’s forward guidance would lose much of its power to influence economic behavior.
The biggest damage of all will likely come from the rising interest rates. Rising interest rates kill the federal budget because of the huge debt load the federal government is servicing.
Independence for the Fed! It might not make for a sexy political tagline, but it sure is vital.