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lite.cnn.com - on gopher - inofficial
ARTICLE VIEW:
Trump is playing with fire by messing with the Fed
Analysis by Matt Egan, CNN
Updated:
1:36 PM EDT, Tue August 26, 2025
Source: CNN
President Donald Trump promised voters last fall he’d swiftly defeat
inflation once back in the White House. Trump’s unprecedented and
relentless attacks on the Federal Reserve could do the exact opposite.
While Trump is the first US president to he’s hardly the first
politician to seek lower interest rates.
Of course, presidents want to please voters with dirt-cheap mortgages,
car loans and credit cards.
And it’s not shocking that a president would want to run the economy
hot, opening the door to blockbuster GDP growth and record stock prices
that would provide fodder for campaign ads.
Here’s the problem: The Fed is designed to be independent from
political interference – and that’s no accident.
Economists and former Fed officials warn that Trump is playing with
fire by messing with the Fed. They say that letting the White House
call the shots on interest rates to please voters can backfire. And
history backs that fear up.
“I feel uncomfortable about this. It seems like another attempt by
the president to erode monetary policy independence. And that will lead
to worse economic outcomes,” Narayana Kocherlakota, former president
of the Minneapolis Fed, told CNN in a phone interview on Tuesday.
The risk of overheating the economy
The first problem is that artificially low interest rates can overheat
the economy, fueling inflation – the
Cheap borrowing costs typically stimulate demand – whether it needs
to be stimulated or not. And overstimulating leaves too many dollars
chasing after too few goods. That’s what happened after Covid-19,
when
Inflation is already running uncomfortably warm, with progress back
towards to the Fed’s 2% goal stalling out in recent months in part
due to Trump’s historically high interest rates.
Voters are already frustrated with the high cost of living. Messing
with the Fed could exacerbate this problem.
Mortgage rates could spike
The other big problem is that investors would be rattled if they
suddenly fear the Fed has lost its independence – and its
inflation-fighting appetite.
Critically, the Fed’s power comes in part from its ability to
persuade markets and the public at large that it means business when it
comes to keeping a lid on inflation.
If investors suddenly doubted the Fed’s commitment to low and stable
inflation, they will obviously demand higher returns for making
long-term loans. In other words, long-term interest rates – the ones
controlled by investors, not the Fed, would go higher. And long-term
rates are the ones linked to mortgage rates.
“The more the market thinks the White House is running Fed policy,
the higher longer-term rates like mortgage rates will go,” said
Kocherlakota, who served at the Fed until 2015 and is now a professor
of finance at the University of Rochester.
Mortgage rates are already frustratingly high, spending most of the
year stuck near 7%, contributing to the affordability crisis that has
pushed the American dream of homeownership out of reach for far too
many.
That’s the irony of Trump’s assault on the Fed: It risks
undermining his campaign promise to drive down inflation. It could also
exacerbate the No. 1 economic issue: the cost of living.
Inflation spiked after Nixon and Erdogan meddled
History shows this can end badly.
In 1970, President Richard Nixon tapped Arthur Burns, one of his top
economic aides, to lead the Fed.
Even though Burns was known as an inflation fighter, historians say
Nixon successfully pressured his handpicked Fed chief to juice the
economy with low rates to boost his political fortunes.
A review of telephone conversations “clearly reveals that President
Nixon pressured Burns, both directly and indirectly…to engage in
expansionary monetary policies prior to the 1972 election,” according
to a 2006 published in the Journal of Economic Perspectives. “Richard
Nixon demanded and Arthur Burns supplied an expansionary monetary
policy and a growing economy in the run-up to the 1972 election.”
By the late 1970s, prices were out of control.
Inflation in 1980 and unemployment surged in what later
More recently, Turkish President Tayyip Erdogan fired his country’s
central bank chief in 2021 and . As the Turkish central bank slashed
interest rates at Erdogan’s behest, the Turkish lira crashed and
inflation blew past 80%.
“History teaches us what can happen when a populist strongman decides
to take over a central bank,” Justin Wolfers, an economist at the
University of Michigan, told CNN in a phone interview.
Tim Mahedy, former senior advisor at the San Francisco Fed, described
Trump’s attempted firing of Fed Governor Lisa Cook as a “naked
attack on the independence of the Fed.”
Mahedy, now the CEO and chief economist at Access/Macro, said in an
email to CNN that Trump has already “somewhat politicized monetary
policy.”
“Trump is breaking the cardinal rule of central banking: Criticize,
but don’t politicize,” Mahedy said. “He, and all of us, will pay
a steep price if he’s successful in his pressure campaign – a cost
that we would bear for generations.”
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