Here’s What Happens to the Economy if Trump Fires Jerome Powell and Installs a Loyalist at the Fed
President Donald Trump wants to lower interest rates to approximately zero, a change that could goose the economy in the short term but in the long term would lead to roaring inflation. Federal Reserve Chairman Jerome Powell won’t do that, and so Trump has been clearly communicating his dissatisfaction with Powell. And while Trump says he’s “highly unlikely” to fire the man, that isn’t a definite no—and Powell’s term expires next May, so we’re bound to see someone new in the job soon either way.
The names being kicked around for Powell’s replacement include National Economic Council Director Kevin Hassett, financier and Stanford lecturer Kevin Warsh, Federal Reserve Governor Christopher Waller, and Independent Institute Senior Fellow Judy Shelton. Right now the smart money is on Hassett, a policy wonk who has held various positions in Washington, D.C., for 25 years. Hassett can be something of a Trump hack: He is constantly going on TV to defend the president’s policies, however inane they might be. But he has also said all the right things about Fed independence, and he seems to be sincere about that.
Hassett believes that rates should be perhaps 1 percent to 1.5 percent lower. This would take monetary policy from a more restrictive stance to something approaching neutral. It is unlikely, given current economic conditions, that Hassett would be willing to lower rates below that, and at some point that would probably prompt another conflict with Trump.
Trump wants interest rates to be lower because he wants to rev the economy and generate more tax revenue without having to do the hard work of cutting government spending. He argues that high interest rates are hurting consumers; on the other hand, they are also helping savers. In the 2010s, when interest rates were zero, retirees were forced to buy high-yield bonds or stocks just to get a decent return. Lowering interest rates far below neutral levels causes excessive risk-taking and, eventually, speculative bubbles.
Many people mistakenly believe that when the Fed lowers interest rates, consumer rates—like those for mortgages or car loans—automatically go down as well. That is not necessarily true. Interest rates vary based on their term length, from short-term to long-term. Mortgage rates, for example, are tied to 10-year Treasury yields, not the short-term federal funds rate. In fact, when the Fed cuts the federal funds rate—an overnight rate—long-term rates can actuall
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