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I thought the biggest economic news that would be coming out of the Trump administration this year was the trade war, but as usual, the Trump administration continues to surprise everyone!
Trump has publicly attacked Powell over the past several days, calling the Fed chair “a major loser” whose “termination cannot come soon enough.”
“So what?” You might think. Trump’s going to fire someone. Trump fires people all the time! It’s kind of his thing!
The Federal Reserve chair is different. It’s one of the few times that the Supreme Court stood up to Trump, ruling that the president is not allowed to fire the head of the Federal Reserve, unless there was an allegation of misconduct.
The Federal Reserve is the largest and most important central bank in the world. First established in 1913 after a series of financial panics, the Fed is so respected around the world that it’s become a model for how a country should run its monetary policy. And one of the lynchpins of this system is that the Fed operates independently from the government. Neither the president nor Congress can tell the Fed what to do.
If you take that away, bad things happen.
Let’s game out what would happen if Trump were to go through with his threat and fire Powell. Remember, Trump doesn’t want to get rid of Powell because he simply doesn’t like him. Trump has stated that he wants interest rates to be much, much lower.
“You have cost the USA a fortune and continue to do so,” Trump wrote in a handwritten note to Powell that he posted on Truth Social last month. “You should lower that rate by a lot. Hundreds of billions of dollars are being lost.”
In the same post, Trump blamed the Fed board, saying, “If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost … We should be paying 1% Interest, or better!”
He’s not wrong about the cost of interest. This fiscal year, interest on debt will hit a TRILLION dollars for the first time. This is more than the US government’s entire budget for its armed forces!
However, firing Jerome Powell and appointing a lackey that will drop interest rates regardless of the consequences may backfire spectacularly, and here’s why.
The Return of Inflation
The Fed was created with a dual mandate: Control inflation and maximize employment. It does this by lowering interest rates when the economy is in a recession, which stimulates spending. However, when the economy isn’t in a recession, it has to raise interest rates back up so that inflation doesn’t get out of control.
We all know what happens when interest rates are kept too low for too long, because we all just lived through it. During the pandemic, central banks around the world dropped interest rates down to 0% and printed money like crazy, but they were a little bit too slow to take their foot off the gas, and inflation went nuts, topping out at just under 10% back in 2022 before coming back down again.
So imagine what would happen if interest rates were to drop like it was the pandemic, only there’s no pandemic. Add to that the fact that inflation is already starting to creep up due to the impacts of all the tariffs, and there’s the potential of a super-wave of inflationary pressure hitting all at once.
The inflation that we saw in 2022 of “only” 10% may end up being “the good old days.”
Bond Yields Spike
Now let’s talk about bond yields.
When the Federal Reserve sets their interest rate, they’re setting what’s called the federal funds rate. This rate determines the short-term interest rate that you can get on money market funds and savings accounts. But bonds come in many flavours, and over varying term lengths, like 5Y, 10Y, and 30Y. The federal reserve doesn’t set these interest rates, nor can the federal government. The bond market decides.
Here’s the current USA bond yield curve.
So the data points on the left, which are the short-term lending rates, are set by the central bank. These are the ones Jerome Powell can control. The line on the right, however, is determined by how much bond traders are willing to pay for those bonds.
This is where a spiking inflation rate can really wreck havoc.
Put yourself in a bond trader’s shoes. If you could put money into a savings account and earn 4%, would you buy a long term bond that requires you to lock that money up for many years if it paid the same interest rate? No! You would demand a higher yield to compensate you for locking your money up.
Now let’s add high inflation into the mix. If you know that every year, USD would be worth less and less because inflation was running at, say, 10%, you wouldn’t touch a US bond with a ten foot pole unless it was paying you at least enough in interest to offset inflation.
That’s where the danger lies in dropping interest rates so rapidly. While the left part of that yield curve will come down, the right part of the line may curve up so sharply that the long-term lending rate (which is used to finance the government) may end up even higher than it is now.
The USD May Lose Its Reserve Currency Status
And finally, there’s the giant elephant in the room that nobody wants to talk about: The possibility of the USD losing its reserve currency status.
The world doesn’t use the USD as its reserve currency simply because the US is a superpower. China is also a superpower, but people don’t hoard renminbi in the same way they hold dollars because the renminbi is widely seen as vulnerable to manipulation by the Chinese government. Nobody wants to hold large amounts of Chinese yuan if their money can get devalued on a whim by Xi Jinping.
In other words, the renminbi isn’t considered a reserve currency because the Chinese central bank is not run as an independent agency like the Federal Reserve is.
But don’t take just my word on it. For a recent example of what happens when a government takes control of their central bank and drops interest rates for political reasons, let’s see what happened to Turkey.
Turkey’s president, Recep Tayyip Erdoğan, moved to take control of the Central Bank of the Republic of Turkey in 2018. He has since fired five of the bank’s leaders—all of whom he appointed—and has generally called for keeping interest rates low…
The country has seen astronomical inflation over the last few years, reaching as high as 85% in 2022. Inflationary pressures have since dropped, but consumer prices in Turkey are still up by about 35% over the last year.
Today, the country’s benchmark short-term lending rate is 45%.
Other examples of countries who attempted this are Argentina and Venezuela. Quick, when was the last time you thought “Man, I gotta put my money somewhere safe, so I’m going to convert it into Venezuelan Bolivars?”
Exactly.
Conclusion
While a lot of the Trump administration’s moves on the economy are worrisome, most of it won’t cause irreversible damage. If tomorrow, Trump wakes up and says “You know what? This trade war was a bad idea. I’m dropping tariffs to 0%,” the world economy would eventually right itself.
Monkeying around with the Federal Reserve, however, plays with fire in a much scarier way. If the USD were to ever lose its status as the world’s reserve currency, there’s no coming back from that. The world would move on to the next most stable currency, which would probably be the Euro.
All this is to say that politicizing the Fed would be a really bad idea, and might even cause the US to give up their economic superpower status to…Europe, of all places.
What do you think will happen? Do you think Trump will end up firing Jerome Powell? Let’s hear it in the comments below!
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I agree with the premise but I also don’t think he will fire Powell. Just my opinion. Great site and look forward to these weekly blog posts.
Trump is catering every part of the US. His pernicious, ignorant destroy-o-rama has touched all of government and society.
In six months.
Cratering.
If there ever has been an Evil Incarnate, he is it.
(#Deport . Trump . to . China)
YoY price increases so far — according to recent bills received at our household:
Auto insurance +11.0%
Homeowners insurance +18.5%
Electricity +24.6%
National gas +22.0%
Water +9.8%
I encourage *everyone* to carefully look at their bills and calculate their YoY increases.
For electricity, as an example, you can easily find the rate cost by dividing the total amount charged by the kWh used.
Oh, there are these Tariff Taxes that are increasing prices for all every day purchases, too.
Crescent moon: where do you live?
I live in coastal Florida and your experience is widely different from mine.
Auto Insurance up less than 5%
Home owners insurance down by about 20% but that is because we had a doubling from 2020 to 2024. We have some new entrants in Florida because the price of selling is now attractive.
Electricity is down about 5%. I’m a huge user of electricity and over the last few years my rates have ranged from $0.14/kwh to $0.19/kwh. We are down around $0.15/kwh in 2025 because the fuel surcharge has come down a lot. Core fixed charges are very stable.
I have propane not natural gas and it has come down slightly from a published rate standpoint but a lot (about 20%) because competition is back and I got a discount to lock up with a supplier.
Water has been flat and mostly stable for a few years.
I also have another home in Atlanta and home related costs are very, very flat. The only thing rising is my HOA fee.
I just wanted to share because I think there is a wide local effect to cost of living. I have lots of extended family in New York area and their costs are high comparted to the south and the rate of cost increase seems much higher than here. Ditto for California. A friend in the San Diego area is paying over $0.40/kwh for electric power…about 3x my rate!
this is shallow MSNBC level analysis that doesn’t say anything useful
the US dollar cannot lose its status as reserve currency because, as you said so yourself, there is no alternative
comparing the US to Turkey or Venezuela is just laughable
You missed the entire point my trumpy friend. Unsurprisingly. The analysis was spot on for all of us who don’t have a dog in the US political fight and just care about protecting and growing our savings.
No alternative?! It is literally mentioned right in this post: “The world would move on to the next most stable currency, which would probably be the Euro.”
I often wonder with Trump being so bullish on Cryptocurrencies if the plan is in fact to have the US lose its reserve currency status ?
I think he actually wants to devalue the USD to make manufacturing in the US attractive again. That has been his goal in the previous term in office.
Let’s be honest.
Do you really think he understands any of the economic principles discuss here??
I do not think he does , and that is very concerning indeed.
I doubt he would have had a solid grasp of any kind of economic policy even when he was in his 40s.
Now, almost pushing 80+, he is just a weak, senile, and confused ignoramus. Nothing more.
exactly
I don’t think he does. Isn’t it surprising for a Penn graduate?
He’s a true manifestation of how bad a politician can be.
The Trumpeteer wants to Fed up (!) Powell so he leaves by himself. And set public expectations of himself being in charge of monetary policy. Dangerous, delusional, deranged.
You have a gift for explaining economic stuff, Wanderer.
What about another book?
Your writing is fabulous Bryce. LOVED the article. I am not going to predict though! lol
The conventional narrative often champions the Federal Reserve as an indispensable, independent body crucial for economic stability. However, a first-principles look at the U.S. Constitution and the practicalities of governance invites a deeper critique, questioning the very foundations of this accepted wisdom. The assertion that a president’s influence on the Fed could “destabilize” the dollar frequently overlooks fundamental constitutional principles and alternative economic viewpoints.
At its core, the U.S. Constitution designates the President as the sole executive authority. The Federal Reserve, unlike constitutional entities, is a “creature of law and tradition,” established by Congress. This distinction is vital. If the President is the chief executive, then the idea of an entirely autonomous body, unaccountable to the elected head of government, demands scrutiny. The Fed’s “independence” is a statutory and historical construct, not a constitutional mandate, prompting legitimate questions about its ultimate value or even its constitutional alignment.
Flowing from this, any president is absolutely entitled to hold and pursue specific economic opinions. As the nation’s elected leader, it’s a duty to formulate an economic vision and seek to implement it. The alarm over a president’s preference for lower interest rates, for example, often disregards it as a valid economic perspective. Moreover, the claim that lower rates inevitably trigger “excessive inflation” or unquestionably cause bond rates to surge oversimplifies complex economic realities. Economic outcomes are shaped by a multitude of factors—global forces, technological advancements, fiscal policy—none of which are purely predictable.
Indeed, compelling arguments suggest that somewhat lower interest rates could significantly boost the domestic U.S. economy. Such a policy might stimulate home building, encourage consumer durable purchases, incentivize business capital investments, and foster new business formation. These are vital engines of growth, potentially crucial for preparing the U.S. economy for major shifts, like large-scale AI implementation, which could initially impact employment. A proactive economic “jumpstart” could cushion these transitions and position the economy for future prosperity.
Furthermore, the perceived sanctity of the U.S. dollar’s reserve currency status also warrants re-evaluation. A reserve currency often inflates its value beyond intrinsic worth, potentially making U.S. goods uncompetitive and favoring imports. From a domestic competitiveness standpoint, the Euro, if it were to assume primary reserve status, could conceivably benefit the U.S. by making its exports more competitive and encouraging domestic manufacturing, especially alongside strategic tariffs. However, it’s also critical to acknowledge practical limitations: the Euro lacks a single sovereign backing, and the Yuan’s non-convertibility effectively prevents it from achieving global reserve status.
Ultimately, the “bottom line” is clear: the Federal Reserve’s policies aren’t infallible, and the President has strong constitutional support to advocate for and implement their economic vision. A president’s economic opinions, even if unconventional, can be rooted in a reasoned desire to stimulate domestic growth and rebalance global economic competitiveness. The debate over the Fed’s independence and presidential economic authority isn’t just academic; it touches on fundamental questions of accountability, strategy, and the very structure of American governance in a rapidly changing world.
So, the US President who has total immunity from criminal or civil action would be more accountable than the Fed Chairman?
Oddly yes. The constitution is the sole governing document of the United States. Everything else rests upon authoritative assumptions or judgements about inclusion in constitution by inference. Since it’s founding, the Fed has been on shaky grounds. Having a third party corporation (the FED) manage the USA debt and currency issuance with an exclusivity clause AND ‘independence’ from the executive really is something that is hard to place within the boundaries of the constitution. Under current assumptions, the Fed is not accountable in any way short of significant malfeasance even if policy is clearly wrong or against the wishes of the executive. And this is wrong.
As President, the direct immunity from criminal or civil action from actions related to being President are pretty clear although not stated directly. Certainly more clear than Judicial immunity … there is NO text on immunity in the constitution on inferior Article 3 courts. These inferior courts are solely creatures of Congress and the presidency. The strongest argument is the Presidential power of pardon with covers all federal crimes and does not exclude Presidential self pardons.
It doesn’t matter whether you or I like or approve, it is what is in the constitution that is important. If it bothers enough people, the constitution can be amended.
Finally, like it or not (I wasn’t too fond of Biden), Trump is the ‘Article 2 Executive’ and the SOLE operator of the government. This really does mean that his opinion is relevant and that, absent constitutionally valid laws, he should be able to execute actions based solely on his opinion.
So, “oddly yes” is your final answer? Because, oddly enough, in your long argument I cannot find a reason why Trump would be more accountable than Powell. Which is not surprising, since Trump put so much effort into not being accountable to anything and anyone.
Oh, by the way, Fox informs us today of a criminal referral against Powell. Because the line of reasoning is, I am immune, but you are not.
Riccardo:
Trump was elected to serve as executive. Not appointed. In the job based strictly on the text of the constitution. And he can be impeached at any time. The president is accountable. Trump was impeached twice. Even when he was out of office.
Powell believes that he can only be removed by the President and only on the basis of law breaking or malfeasance. Not very accountable. And not in the constitution.
If Powell broke a law he should be prosecuted. Let’s see what happens.
And please note, I am bothered that the Fed requires an office so grand that it costs $2.6 billion just for remodeling! I’ve never understood why these guys shouldn’t be working out of cubicles in a refurbished former WalMart. And maybe we should look into why a relatively simple operation requires so many thousands of high priced people. see: https://www.cnbc.com/2025/07/21/treasury-secretary-bessent-calls-for-a-review-of-the-entire-federal-reserve.html and Scott Bessent says: “All these PhDs over there, I don’t know what they do. This is like universal basic income for academic economists.”
Not sure when we entered the twilight zone, but here we are. I don’t remember much about from my high school government class, but what I do remember is what made the US great was that the founders created THREE branches of government. This was intentional so the US would be deliberately resistant to centralized executive authority, especially over something as destabilizing as monetary policy.
The Federal Reserve was created by Congress via the the Federal Reserve Act.
Conservatives should be abhorred at Trump’s actions, every authoritative move he makes sets a precedent for the next knuckle head (and probably a Democrat) to do the same thing and then some. Shocking behavior honestly.
LadyXennial: Yes, the founders did create 3 branches of government. Article 2 is the Executive (President) with SOLE authority to actually run the government and to execute laws passed by Congress and approved by the President. Laws do not rewrite the constitution.
The Federal Reserve has no constitutional right to operate outside the control of the President. It is really that simple.
If you want it different, change the constitution.
Not sure what you mean by “laws do not rewrite the constitution.”
I have to follow the law of the land and so does the President. And right now the Fed IS legal AND constitutional. There is plenty of legal precedent according to my google search. If Congress gets rid of the Fed then so be it (however even this would be just a trick in the conservative playbook to have the US closer to an autocracy).
He is not the ‘Sole’ executor of laws especially when there are a multitude independent offices as part of the executive branch.
I’m looking at your often referenced Article 2:
says the President must
“take Care that the Laws be faithfully executed.”
This means the President is responsible for carrying out laws passed by Congress- not for interpreting them however they want, rewriting them, or ignoring them. If Trump refuses to follow the courts or laws passed by Congress, he’s violating his constitutional role.
I don’t think we need to change the constitution, we just need people in power to actually abide by the checks and balances that are there.
Fascinating take on the potential fallout from firing Jerome Powell! Economic stability, especially the health of the U.S. dollar, plays a huge role in interest rates and, in turn, mortgage costs. As a mortgage professional, I often see how global financial shifts impact local markets. It’s crucial for homebuyers and investors to stay informed on macroeconomic changes to understand how they might affect their mortgage rates and purchasing power.
vishal: is there any doubt on your part that if the fed lowers rates by a half point that mortgages would also be lowered by a half point or more? Hasn’t this always been the case? Trump wants mortgages to fall so homebuilding and construction flourish. Sounds good to me.
Like WFH above, most Americans think US dollar cannot lose its status as reserve currency. That’s exactly what’s gonna happen.
Do you think the last Roman emperors would agree that it was its last days as the largest empire the earth has seen? Nobody thinks it’s gonna happen until it happens.
Yeah like Powell alone sets the policy. Will Trump fire all the Fed members as well?
Sarah: As the Constitutions sole Article 2 Executive, Trump should be able to fire any government entity that performs a government function or the people that run it. The fed exists as a hybrid organization that is neither the government or a bank in an attempt to get around the Constitution. What happened a hundred years ago probably wasn’t legal then and likely isn’t now. The fed is a legal construct designed by bankers to keep the government out of monetary policy. The idea might have been a good one but it might not be legal.
Look at Powell’s record, I really wonder why he is still there. If he was any good, how come he wasn’t able to stop the inflation during the previous 2-3 years? He should have raised rates before inflation happened. It was clear that he was ineffective. He dropped interest rate one time just before the election when it was obvious that we did not need one. We are stuck with an ineffective interest rate CEO whom we cannot fire. You talked as if he was indispensable.
Politicizing is indeed dangerous, especially if one incompetent personnel openly advertised his favoritism towards his former boss. We need a forward thinker, not a reactionary who is consistently behind the condition of this economy.
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Trump is living rent free in all your heads. He’s the best president ever. What a bunch of crybabies. Bunch of losers!!
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