President Trump’s latest shot at the Federal Reserve just rattled more than the bond market. Behind the rumors of firing Jerome Powell is a much bigger question: What happens if the world’s most powerful central bank stops acting like one?
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Powell’s Chair Feels Less Stable
Trump suggested this week that he could try to remove Fed Chair Jerome Powell. He accused the bank of slowing growth with high rates. He later said it was unlikely, but markets were already moving. Long-dated Treasury yields jumped, the dollar dipped, gold popped, and traders started asking what the U.S. economy and the global one might look like if politics start steering monetary policy.
The Fed Isn’t Just America’s Problem
For decades, the world has relied on a U.S. central bank that could move quickly and credibly in a crisis. From bailing out markets during the 2008 meltdown to supplying dollars to foreign banks during COVID, the Fed has acted as an economic firefighter for the globe. That ability depends on independence. Harvard economist Jeremy Stein warned that even just the threat of political interference could cause the Fed to lose staff, lose credibility, and freeze up when it’s needed most.
Can the Fed Cut Rates without Fueling the Fire?
Trump has repeatedly called for slashing interest rates by up to 3 percentage points, a move that economists say would fuel inflation rather than cool it. But the president wants lower borrowing costs, especially as tariffs push prices higher and deficits swell. Princeton’s Alan Blinder, a former Fed vice chair, said the idea of forcing those cuts is absurd. If you refuse to raise rates when inflation climbs, he said, inflation will win.
And if markets sense that the Fed is acting under pressure, long-term borrowing costs could go up anyway. Former Reserve Bank of India Governor Raghuram Rajan said that kind of pressure often causes long-term rates to move in the opposite direction. This is a disaster scenario for mortgage and credit markets.
Global Markets Should Care
The Fed’s credibility isn’t just a domestic issue. Its signals are global currency benchmarks. Its rate decisions ripple through London, Tokyo, São Paulo. Former Fed officials say that if investors think the White House is pulling the strings, other countries could start demanding more interest to hold U.S. debt, or worse, begin reducing exposure to the dollar altogether.
Why a Powerless Fed Could Be the Next Global Crisis
Some economists fear that a White House-controlled Fed wouldn’t act quickly during the next crisis. Others say it might ignore dangerous bubbles entirely. If it cuts rates too far now, it won’t have much room left when the next crash comes. Johns Hopkins economist Robert Barbera warned that once you use your monetary firepower to chase growth all the time, there’s none left when you really need it.
Even when Fed policy isn’t perfect, the idea that it acts independently gives investors and governments around the world confidence. Wall Street is increasingly worried that if that image crumbles, it could trigger chaos far beyond Washington.
Goldman Sachs (GS) CEO David Solomon put it bluntly this week: the world needs central banks that act without political pressure. Because once that pressure starts shaping interest rates, markets will start preparing for a world where inflation runs hotter, debt gets riskier, and financial shocks come without a safety net.
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