The Washington Post: What Will Happen If Trump Succeeds in Firing Fed Leaders?

Amidst the ongoing dispute between Donald Trump and Federal Reserve Governor Lisa Cook, the Washington Post has published an article that explores what could happen to the American economy if Trump succeeds in his endeavor. The analysis, written by economic correspondent Heather Long, argues that politicizing the central bank could lead to severe consequences, most notably increased costs for ordinary citizens.

A Historical Precedent and the Dangers of Politicizing the Central Bank

The independence of the Federal Reserve is a cornerstone of the American economy, having helped keep inflation rates low and mortgage costs reasonable. However, if successful, Trump would be the first president to fire a Fed governor since the bank's establishment in 1913.

The article notes that Jerome Powell, the current Fed chair, will have his term end next May, opening the door for Trump to appoint a new chair in 2026. However, Long warns that Trump would not hesitate to try and fire the new appointee if they don't align with his policies, which threatens the central bank's independence.

The Consequences of Artificially Low-Interest Rates

Although presidents often favor low-interest rates to stimulate the economy and help citizens borrow, Long warns against keeping them artificially low. Such a measure could lead to:

1. Economic Bubble: The collapse of internet companies and a significant recession caused by issuing loans to people who cannot afford them.

2. Inflation Crisis: Spiraling inflation, similar to what occurred in the 1970s and 2022.

The author adds that these crises could set the U.S. economy back for years, much like the "lost decade" in Argentina in the 1980s, when rising debt led to a severe economic depression.

Eroding Trust in the Financial System

The article acknowledges that the Federal Reserve is not perfect, but its decisions, made by an independent 12-member committee, prevent the central bank from becoming politicized. This independence has fostered global trust in the American financial system, which has in turn led to lower borrowing costs and increased demand for dollar bonds.

A chief economist at the Navy Federal Credit Union warns that Trump is "tampering with this trust," and the negative effects of this will become apparent over time.