Photo by Brendan Smialowski/AFP via Getty Images)
The US Federal Reserve system employs almost 25,000 people. Its rate-setting board alone employs several hundred researchers, almost all of whom have a PhD in economics. Their job is to come up with one of the world’s most important numbers: the Fed funds rate, which is effectively the price of money in the world’s most powerful economy, and which affects the prices of commodities and financial instruments around the world. Now, however, America is proposing replacing this multi-billion-dollar system of data collection and careful economic modelling with a new approach: whatever number sounds right to Donald Trump, who is 80 this year and struggles to stay awake during public events.
On Sunday 11 January the Federal Reserve announced that it had received subpoenas from the Department of Justice, “threatening a criminal indictment” of its chair, Jerome Powell. The investigation ostensibly relates to overspending on the renovation of Fed buildings, but in a statement released on Sunday, Powell dismissed this as a “pretext”; the real charge is that Powell and the Fed have continued to set interest rates according to their mandate to control inflation, and not according to “the preferences of the President”. Trump says he had nothing to do with the investigation, but he has repeatedly stated he would like to fire Powell. Less than two weeks ago he said of Powell: “we’re going to probably bring a lawsuit against him”. Perhaps he forgot.
Powell’s term as chair ends in mid-May, but he would remain as one of the Fed’s seven governors – who vote on monetary policy – until 2028, unless he was removed by criminal charges. The Trump administration tried (and has so far failed) to remove another Fed governor, Lisa Cook, by similar means. Seizing control of monetary policy – which the Fed has decided independently since 1935 – is part of the Trump administration’s concentration of power in the executive branch and America’s ongoing descent into autocracy. It’s also politically attractive in that it may give Trump a boost in the mid-term elections this November. Lower rates could encourage business activity, and would very likely boost American stock markets. Paired with other populist economic policies such as handing out “tariff dividend” stimulus cheques, capping credit card interest rates, preventing companies from buying up housing and having the state buy hundreds of billions of dollars’ worth of mortgage-backed securities, Trump is pulling every lever available to make Americans feel better off by November.
However, as Argentina found under postwar Peronism, economic populism can become very expensive. The price for juicing the US economy enough to give Trump continued control of Congress at the end of the year will be paid, in the years that follow, by his own voters. Having stimulated demand in the US economy – by making debt cheaper and handing out free money – the US can expect to experience inflation. The time frame is uncertain; the effects of monetary policy can take a year or two to arrive. But the key risk, this time, is that prices will not be stabilised by an independent central bank. Inflation will be allowed to persist by a president who is not just ideologically committed to cheap debt, but personally enriched by it.
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When the White House is run with a close eye on the finances of the person inside it, this is a key consideration. Inflation is awful for ordinary people, but the money of the billionaire class is different; their wealth is composed of financial assets that reach higher values when debt is cheap. The cheap-money regime of the post-2008 era “did much to multiply wealth for those who initially had assets”, says Jagjit Chadha, professor of economics at the University of Cambridge, “and more policies along these lines would have exactly the same impact”.
For Trump, low rates are the heat that inflate the major components of his own net worth, such as shares in his publicly traded company and weird cryptocoins with his face on them. He is unlikely to give up that wealth-swelling power just to make eggs cheaper. Higher interest rates are also unpopular, even when they’re desperately needed; the former Fed chair Paul Volcker, who administered this medicine in the 1970s, was reviled by the American public. Trump is far too thin-skinned to accept such a responsibility.
It seems unlikely that Trump would face a Truss moment – a collapse in government bond prices – because with the Fed under his control, he would be able to compel the central bank to buy Treasury bonds, keeping their prices high and borrowing costs down. America’s power to borrow is unrivalled. But he would not have the same control over the dollar. “The effect would be felt in the currency, not in bond yields”, explained the economist Frances Coppola, “because a captured Fed could control bond yields. But it couldn’t control the value of the dollar.”
A falling dollar is not necessarily a nightmare for the Trump administration, which believes a less valuable dollar would boost America’s exports and therefore create lots of proper, manly jobs in factories. But again, there is a price to pay, in the form of inflation, as a falling dollar would increase the prices of imported goods. There is also the more serious risk that the dollar starts to be “internationally rejected” Coppola explained. “That is what brought down the populist experiments in South America – it was an FX crisis.”
To the plutocrats of the Trump administration, inflation is an abstract concept; their wealth, concentrated in assets, is so much greater than their spending that it cannot noticeably affect them. The people who feel inflation most seriously are the people who have the least disposable income – in the US, the bottom quartile of earners. The majority of low-income households in the US voted for Trump in 2024. He is preparing not only to dupe these low-income voters with the illusion of a functioning economy, but to make them pay for it.
[Further reading: Trump’s push for Greenland could destroy Nato]
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