Trump Vs. Jerome Powell: Inflation Would Increase
The U.S. president is threatening to prosecute the chair of the Federal Reserve. Trump wants to cut interest rates, but that would be catastrophic for the U.S. economy.
U.S. President Donald Trump wants to be a dictator. His will alone should count, and now, it’s the Federal Reserve’s turn to come under attack once again. The U.S. Justice Department is considering charges against Fed Chair Jerome Powell related to excessive renovation costs for the Federal Reserve buildings. In reality, Trump is trying to influence the Fed’s interest rate policy. He is firmly convinced that the U.S. economy would boom if interest rates fell sharply.
But that's a naive calculation, typical of Trump. Imagine for a moment that interest rates actually dropped sharply. Short-term borrowing would become cheap, demand would increase — and prices would rise. Inflation, recently at 2.7%, would increase even further. That dynamic would be clear to banks and financial investors, which is why they would offer long-term loans at a risk premium. They would then insist on higher interest rates than before.
The overall effect would be bizarre: Short-term credit would initially be cheap, but long-term credit would become more expensive. That would be bad news for the economy, as major construction projects, such as homes and factories, are financed through long-term loans. In addition, foreign investors could flee if Trump were to strip power from the Fed and set interest rates at will. They could sell U.S. bonds and convert them to euros or gold. The U.S. dollar would weaken, making U.S. imports more expensive.
Yet again, inflation in the United States would increase, not fall. Many Americans already feel they can no longer afford the cost of everyday living. “Affordability” was the buzzword that helped Democrats win recent elections in New York, Virginia and New Jersey. Trump is working toward his own downfall.
U.S. President Donald Trump wants to be a dictator. His will alone should count, and now, it’s the Federal Reserve’s turn to come under attack once again. The U.S. Justice Department is considering charges against Fed Chair Jerome Powell related to excessive renovation costs for the Federal Reserve buildings. In reality, Trump is trying to influence the Fed’s interest rate policy. He is firmly convinced that the U.S. economy would boom if interest rates fell sharply.
But that's a naive calculation, typical of Trump. Imagine for a moment that interest rates actually dropped sharply. Short-term borrowing would become cheap, demand would increase — and prices would rise. Inflation, recently at 2.7%, would increase even further. That dynamic would be clear to banks and financial investors, which is why they would offer long-term loans at a risk premium. They would then insist on higher interest rates than before.
The overall effect would be bizarre: Short-term credit would initially be cheap, but long-term credit would become more expensive. That would be bad news for the economy, as major construction projects, such as homes and factories, are financed through long-term loans. In addition, foreign investors could flee if Trump were to strip power from the Fed and set interest rates at will. They could sell U.S. bonds and convert them to euros or gold. The U.S. dollar would weaken, making U.S. imports more expensive.
Yet again, inflation in the United States would increase, not fall. Many Americans already feel they can no longer afford the cost of everyday living. “Affordability” was the buzzword that helped Democrats win recent elections in New York, Virginia and New Jersey. Trump is working toward his own downfall.
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