Trump, with his "America First" strategy and the slogan "Make America Great Again", has continued to introduce various reforms, and his recent tariff policies have disrupted the global economy, drawing criticism from economists.
Paul Krugman, the 2008 Nobel Prize winner in Economics, earlier criticized Trump's tariff policies as lacking basic economic logic, likening them to "quack economics".
Regarding Trump's recent frequent pressure on the Fed to significantly lower interest rates and even threatening to replace the current Fed Chairman Powell, Krugman wrote an article titled "Why You Should Fear a Trumpified Fed", strongly refuting the potentially disastrous consequences of Trump's attempt to control the Fed.
Krugman: Why Does the Fed Need to Maintain Independence?
In the article, Krugman first uses the historical example of 1982-1984 to illustrate how the Fed profoundly influences the economy through monetary policy.
He pointed out that in 1982, when the US economy was in trouble with unemployment at 10.8%, the Fed loosened monetary policy in the summer, causing interest rates to drop significantly. About six months later, the economy began an amazing recovery, with economic growth reaching 4.6% in 1983 and 7.2% in 1984. This history shows the Fed's ability to reverse economic situations quickly, far exceeding typical government policies.
Given this, Krugman emphasized that the Fed's independence is the cornerstone of maintaining economic stability and the global status of the US dollar. He explained that monetary policy is "extremely easy" to implement, such as the Federal Open Market Committee directly instructing the purchase of government bonds without complex legislative procedures. Therefore, due to its enormous influence and ease of policy implementation, the Fed must be isolated from political pressure to prevent abuse. Krugman warned:
The Fed's independence is crucial. When the Fed chairman is appointed by the president and confirmed by the Senate, he should be allowed to complete his term without political interference, or it may become a political tool, undermining investors' confidence in the US dollar and potentially triggering global financial turmoil.
Krugman then cited a Wall Street Journal report indicating that Trump privately discussed firing Fed Chairman Powell and publicly stated: "If I want him to go, he'll be gone very quickly, believe me."
Krugman believes this demonstrates Trump's disregard for legal constraints, with his "insanity" evident in his posts on Truth Social. If Trump successfully brings the Fed under his control, the consequences would be unimaginable. Krugman warned:
Trump might order the Fed to drastically lower interest rates to stimulate the economy, regardless of inflation risks, and even use the Fed's power to punish uncooperative businesses or state governments, causing economic chaos. More seriously, if international investors sell US dollar assets due to the Fed's loss of independence, it could trigger a global financial crisis.
Historical Review of US Politicians Interfering with Fed Decisions
Notably, Krugman also cited the serious consequences of Fed decisions being dominated by President Nixon in the 1970s. In the early 1970s, facing high inflation and economic slowdown (stagflation), the Nixon administration pushed for tax cuts and expansionary fiscal policies while pressuring the Fed to maintain low interest rates and loose monetary policies to stimulate the economy, reduce unemployment, and support Nixon's 1972 re-election.
The final result showed that Fed Chairman Arthur Burns allowed money supply to grow rapidly in 1971, with M1 growth rate reaching 6-7%, exceeding long-term stability targets. While short-term economic growth was strong in 1972 (GDP growth of 5.3%) and unemployment dropped to 5.6%, helping Nixon win re-election, the long-term overly loose monetary policy exacerbated inflation, causing inflation rates to soar to 11% in 1973-1974. Combined with the 1973 oil crisis, this led to severe stagflation in the US.
Besides this negative history, the US has positive examples of the Fed resisting political interference over the past half-century. In 1979, Fed Chairman Paul Volcker, to control 13.5% inflation, adopted aggressive interest rate hikes (federal funds rate peaked at 20% in 1980-1981), causing a recession in 1981-1982 with unemployment reaching 10.8% in 1982.
The Reagan administration openly criticized high interest rates, and some congressional members threatened to modify laws to limit Fed independence. However, Paul Volcker maintained independence and refused to yield. Ultimately, inflation dropped to 3.2% in 1983, laying the foundation for economic recovery in the mid-to-late 1980s.
