The Sleeper Issue That Could Smash the Economy
There are many items on President Trump’s agenda that threaten the U.S. economy: pointless trade wars, the public sector being nudged toward private-sector socialization, mass deportations, and more. Yet the long-term danger may come from a policy that’s received little attention outside finance circles: Trump’s ambition to undermine the Federal Reserve. If he succeeds, he could lock the United States into years, or even decades, of high inflation.
Bullying the Fed has long been a favorite tactic for Trump. As far back as 2019, he labeled Jerome Powell—whom he had appointed as Fed chair—the “enemy.” He has continued to press the issue during his second term, frequently musing about firing Powell, including earlier this year. The idea drew attention when it caused market jitters and during a tense visit Trump paid to the Fed’s headquarters as a show of intimidation. But the firing never happened. Once the threats faded, most outlets moved on.
They shouldn’t have.
Threats to Fed independence have persisted and grown darker this week. We may be at a tipping point, with the Trump administration quietly weighing moves not against Powell personally but against other policymakers who set interest-rate policy. If successful, Trump could seize direct control of the money supply and push the U.S. toward the economic fate of Venezuela.
Let’s ground this in the basics. Why must the central bank be politically independent in the first place?
The reason ties to political incentives. If politicians control interest rates—and thus the money circulating in the economy—they’ll have a built-in urge to cut rates. Cheaper borrowing makes consumers and businesses feel wealthier and more willing to spend, creating a short-term rush that can feel satisfying to the sitting president. But the long-run danger is inflation. When prices rise excessively, the remedy—higher rates—causes pain and political fallout, which makes policymakers reluctant to act decisively, allowing inflation to persist.
That’s why central bankers should be insulated from near-term political pressure. If they prioritize long-term economic health over the next election, they’ll be more willing to take tough steps, like removing the punch bowl before the party gets out of hand.
There’s substantial empirical support for this view. Countries with higher central-bank independence tend to experience lower inflation. Conversely, when politicians seize control of the money supply, inflation often accelerates. You don’t have to travel far for cautionary tales: the United States itself saw political pressure on the Fed during the Johnson and Nixon years, which contributed to the stagflation of the 1970s. If you’re young, ask someone about it—the era left a painful memory of high, volatile inflation and its consequences.
Powell remembers it well. At a Texas event last year, a week after the 2024 election, I asked him whether we’ve learned from past episodes of reduced Fed independence. He warned that during the 1970s, the public lost faith in the Fed’s ability to restore price stability, leading to a decade of hardship for those on fixed incomes. In a recent working paper, a University of Maryland economist quantified the risk: if a president ratcheted up political pressure on the Fed even for six months, the result could raise the U.S. price level by about 7 percent over the next decade. Translation: a Nixon-style press on the Fed today could mean higher prices for everyday purchases tomorrow.
Powell asserted at the time that lawmakers across parties understand the importance of an independent central bank. He argued that the Fed’s independence is essential to serving the public effectively. Yet that confidence may be misplaced.
Trump has continued to pressure Powell since returning to the presidency. He’s given the Fed chair playful nicknames and accused him of mismanaging the Fed’s headquarters project—though the president’s threats to fire Powell seem to have waned, perhaps because Powell’s term ends in 2026 and a unilateral dismissal would likely face legal challenge. Still, Trump remains intent on finding a more pliable successor who would be more inclined to cut rates. In a recent public moment, Trump said cutting rates would be a “litmus test” for his next Fed chair.
The name most often floated as Powell’s replacement is Kevin Hassett, a former advisor and familiar face to Trump. Hassett has earned a reputation for relying on chart-driven arguments that often don’t stand up to scrutiny and for suggesting ideas—such as a controversial “cubic model”—that have fallen flat. Investors have warned that Hassett might not be as independent as a central banker should be, which could scare bond markets.
Indeed, any future Fed leadership would need broad support on the Federal Reserve’s governing body, not just the chair. Trump has pursued other strategies to influence the central bank: appointing Steve Miran, the Council of Economic Advisers chair, to an open Fed Board slot while remaining formally employed in the White House; and pushing to remove Fed officials through accusations or political pressure. In a controversial move, Miran’s appointment proceeded even though he hadn’t resigned from the White House post. Republicans in the Senate ultimately supported his confirmation.
Trump has also targeted other independent Fed officials, including attempts to oust Fed governor Lisa Cook on unfounded mortgage-fraud allegations, which she denies. The administration argues it does not need a stated cause to remove independent-agency leaders, challenging a long-standing precedent. The Supreme Court has recently heard arguments in a case involving the firing of an FTC commissioner, a ruling that could have wide implications for independence across independent agencies, including the Fed.
A subtler and potentially more consequential gambit is underway: reshaping the Fed’s regional structure. The Fed’s leadership includes twelve regional bank presidents, chosen locally but approved by the Fed Board in Washington. Typically, the approval is routine. However, with regional terms up for renewal in February, Hassett and fellow advocate Scott Bessent have floated the idea of purges or reconfigurations, including a proposed long-term residency requirement that would disqualify most current regional presidents. Hassett publicly endorsed the idea as a means to protect the Fed’s independence by aligning appointments with the original design of the system, which would effectively centralize more control in Washington. If adopted, this could upend the Fed’s regional balance and concentrate influence in ways that would affect monetary policy for years.
The broader concern is clear: the Fed’s independence is a bulwark against political manipulation of monetary policy. Undermining that independence risks higher inflation, less predictability, and more economic pain for ordinary people when the cost of policy missteps lands on the public.
Controversy often lies in the details and in what people emphasize. Some argue that keeping a strong separation between politics and the Fed slows needed policy responses during crises. Others contend that central bankers must be accountable to the people and lawmakers. Either way, this is a live debate with real consequences for your wallet and your future.
So, where do you stand? Do you believe the Fed should be shielded from political pressures, or is some degree of accountability to elected leaders essential? How do you think this tension should be resolved as the economy navigates inflation and growth? Share your thoughts in the comments.
