Economists Warn: Markets Underestimate Trump's Fed Attack Risks

Financial Markets Ignoring Critical Fed Independence Threats

Leading economists are sounding alarm bells as financial markets appear to be dangerously underestimating the risks posed by former President Donald Trump's persistent attacks on Federal Reserve independence. According to a comprehensive Financial Times survey of 94 top economists across the United States and Europe, the potential consequences could include higher inflation, reduced confidence in US Treasury bonds, and global economic instability.

Widespread Concern Among Economic Experts

The survey reveals that 89 out of 94 economists believe the Federal Reserve's credibility has already been damaged by Trump's ongoing criticism. More than a quarter fear that by the end of a potential Trump term, the central bank may no longer be able to make interest rate decisions independently. Christiane Baumeister, an economist at the University of Notre Dame, starkly warned that "the Fed will become a puppet of the government" under such pressure.

Historical Context of Fed Independence

The Federal Reserve's independence has been a cornerstone of US economic stability since its establishment in 1913. Central bank independence allows monetary policy decisions to be made based on economic fundamentals rather than political considerations. This separation has been credited with maintaining price stability, controlling inflation, and ensuring long-term economic growth.

Immediate Threats and Recent Escalations

The conflict intensified recently when the White House announced the immediate dismissal of Fed Governor Lisa Cook, who has refused to leave and has filed a lawsuit against Trump. This follows years of Trump publicly criticizing Fed Chair Jerome Powell, whom he called a "fool" for not lowering interest rates more aggressively.

Global Repercussions and ECB Concerns

European Central Bank President Christine Lagarde has joined the chorus of concern, telling French radio station Radio Classique that a dependent Federal Reserve would represent a "serious threat" to both the United States and the global economy. Lagarde emphasized that while it would be difficult for Trump to completely control the Fed, success in doing so would have devastating consequences for worldwide economic stability.

Market Implications and Future Projections

More than half (52%) of surveyed economists expect the Fed to change course next year when Powell's term ends, potentially shifting focus toward lower government borrowing costs and employment at the expense of price stability. This could lead to higher inflation and undermine the dollar's status as the world's reserve currency.

Consensus Among Economic Thought Leaders

Rüdiger Bachmann of the University of Michigan noted that central bank independence is "one of the few topics economists really agree on," explaining that independent policy-making leads to more stable inflation and financial calm. The overwhelming consensus suggests that loss of Fed independence would significantly harm the world's largest economy.