Confrontation between Trump, the Fed might be inevitable

COMMENTARY

DALLAS - Forget the tariffs and mass deportations. The sleeper economic issue of the next few years - the one where President- elect Donald Trump could wreak the most permanent damage - is sabotage of the Federal Reserve.

"We're very focused just on getting the job done for the American people," Fed Chair Jerome H. Powell told me at an event here in Texas in response to a question about threats to Fed independence. "That's enough of a job for us to do, and we're focused on that."

Powell clearly hopes to avoid any political drama. He's not looking for a showdown with Trump. The U.S. economy is tantalizingly close to a coveted "soft landing" after all, largely thanks to the Fed's stewardship. But a confrontation between the White House and central bank isn't entirely up to Powell. In fact, it's starting to look inevitable, given some of Trump's choices.

During his first term, Trump threw tantrums when the Fed modestly raised interest rates, even as the economy was booming. He called Powell an "enemy" and threatened to fire him. (This likely would have been illegal.) Trump also tried to appoint political toadies to Fed positions to undermine Powell and other central bankers.

Trump's vandalism didn't succeed, partly because Powell showed backbone and partly because Trump's own aides and allies foiled him. But the objective was clear: Trump hoped to bully the Fed into slashing interest rates and printing more money, whether the economy needed a boost or not.

Why is Trump obsessed with lower interest rates? Well, as the self-proclaimed "king of debt," his own finances benefit when the cost of borrowing goes down. More importantly, low rates can also help him politically, at least in the near term. Cheap money makes voters feel richer, which encourages them to spend more. This sugar rush can be good for incumbents.

In the long run, though, overheating the economy fuels inflation. And the remedy required to cool inflation - raising interest rates - is quite painful. Politicians, always fixated on the next election, are loath to administer this bitter medicine.

That's why it's a bad idea to put politicians in charge of the money supply (see Venezuela, Argentina, Turkey). Countries whose central banks are more insulated from short-term political pressures tend to have more price stability. When central bankers can focus on long-term economic health rather than an imminent election, they're more willing to "take away the punchbowl."

That's precisely what the Fed had to do these past few years, after supply- chain disruptions and strong consumer demand fueled inflation. So far, the Fed's interest rate hikes, unpopular as they've been, seem to have worked: Inflation is within spitting distance of the Fed's 2 percent target, and the economy is still looking strong.

The central bank's past reputation as a party-pooper has been critical to this success. It's not enough for the Fed be willing to do what's necessary to kill inflation; the public must also believe the Fed will follow through.

"Inflation is a social phenomenon," Powell said. "If people believe that inflation will be higher, then it probably will be. And if they believe that inflation will come down, then people who make and take prices and wages, they will make sure that it does come down. So, it's absolutely critical that we be credible."

Alas, credibility is an alien concept to Trump. While he claims he wouldn't fire Powell, he has said he expects more say over interest rates. Many of Trump's top allies - e.g., "first buddy" Elon Musk, Project 2025 architect Russell Vought, Sen. Mike Lee (R-Utah), economic adviser Scott Bessent - have also urged him to seize control of the Fed or otherwise undermine its credibility.

You might think there's no need for a showdown anytime soon, since the Fed has been cutting interest rates and is expected to slash them at least a little further. But Trump's other economic proposals might ultimately force the Fed to slow or even reverse its rate cuts, setting it on a collision course with the next administration.

That's because so much of Trump's economic agenda is likely to be inflationary( deficit- financed corporate tax cuts, global tariff hikes, mass deportations), which would traditionally lead to more "restrictive" Fed policies (e.g., higher rates). Indeed, shortly after Trump won reelection, markets began pricing in both higher inflation and fewer rate cuts.

Powell has refused to comment on how these policy changes would affect the economy. "I think it's too early to reach judgments here," he said in Dallas.

But contrast that with comments Powell made in December 2016 after Trump was first elected, when Powell said it was "reasonable" to assume fiscal policy under a Republican trifecta would put "upward pressure" on inflation. As Trump's second- term agenda becomes clearer, similar forecasts might become hard to avoid.

Powell and his colleagues clearly wish to stay out of the political fray. But the fray might be coming for them.

Catherine Rampell is an opinion columnist at The Washington Post. She frequently covers economics, public policy, immigration and politics, with a special emphasis on data-driven journalism.

So much of Trump's economic agenda is likely to be inflationary (deficit-financed corporate tax cuts, global tariff hikes, mass deportations), which would traditionally lead to more "restrictive" Fed policies (e.g., higher rates). Indeed, shortly after Trump won reelection, markets began pricing in both higher inflation and fewer rate cuts.