Economists are sounding the alarm that former President Donald Trump's efforts to exert pressure on the US Federal Reserve risk plunging the American economy into a period of runaway inflation reminiscent of the 1970s, while potentially sparking a severe backlash in global financial markets.
A Dangerous Precedent of Political Pressure
The warnings follow the revelation that the US Department of Justice has launched a criminal investigation into the current Fed chair, Jerome Powell. Powell himself stated that a threat of criminal indictment related to his testimony on building renovations is a "pretext" for political intimidation aimed at influencing interest rate decisions. He insisted the legal move was "not about" congressional oversight, but about whether monetary policy will be "directed by political pressure or intimidation."
Analysts have drawn direct parallels with the 1970s, when President Richard Nixon pressured then-Fed chair Arthur Burns to adopt an easier monetary policy to aid his 1972 re-election campaign. This contributed to US inflation soaring above 10% later in the decade. Atakan Bakiskan, US economist at Berenberg bank, cautioned that an ultra-accommodative policy amid high inflation today could recreate that disastrous scenario in a worst-case outcome.
Global Repercussions and Market Jitters
The potential consequences extend far beyond US borders. Bakiskan warned that if the Fed is seen to act on politics rather than economic data, foreign investors could pull back from financing US debt and seek new safe havens. This loss of confidence in the cornerstone of the global financial system would have profound implications.
Jagjit Chadha, a professor of economics at Cambridge University, emphasised the global danger. He noted that many worldwide prices are set in dollars, so uncontrolled US inflation would "immiserate" people globally. The immediate market reaction has been telling: the US dollar fell and gold prices hit a fresh record high as investors scrambled for safety following Powell's statements.
A Critical Juncture for Central Bank Independence
The situation arrives at a precarious moment, with Powell's term as chair expiring in May and Trump expected to announce a nominee this month. Central bank independence is considered sacrosanct by investors for controlling inflation, as it allows policymakers to focus on economic evidence alone.
Trump has repeatedly lambasted Powell for not cutting interest rates more aggressively, calling him a "stubborn mule" and a "numbskull," though no Fed chair has ever been fired by a president. While Trump denied involvement in the DoJ probe, the episode highlights rising political interference globally, exacerbated by post-pandemic inflation and economic struggles.
Jason Furman, a Harvard economist and former Obama adviser, called this a "dangerous moment" and listed countries that have prosecuted central bankers for political intimidation: Argentina, Russia, Turkey, Venezuela and Zimbabwe. The concern is that undermining the Fed's autonomy could not only re-ignite inflation—which picked up to 3% in September after falling from over 9%—but also permanently damage the US's financial credibility on the world stage.
