Donald Trump’s attempts to influence the US Federal Reserve could risk plunging America into a period of 1970s-style inflation and trigger a global backlash in financial markets, economists have warned.
After the US Department of Justice (DoJ) launched a criminal investigation into Jerome Powell, the current Fed chair, investors said efforts by the White House to pressure the US central bank to cut interest rates would put the world economy at risk.
Analysts drew parallels with the 1970s when US inflation soared after the then president, Richard Nixon, pressured the then Fed chair, Arthur Burns, to ease monetary policy to help smooth his 1972 election campaign.
Atakan Bakiskan, US economist at Berenberg bank, said: “If the Fed pursues an ultra-accommodative monetary policy despite higher inflation, the result could resemble the 1970s in a worst-case risk scenario.
“Moreover, if the Fed acts on politics rather than data, foreign investors could pull back on financing the US debt and seek new safe havens.”
The US dollar fell on Monday, while gold prices hit a fresh record high as investors scrambled to buy safe-haven assets. It came after Powell said on Sunday evening he had been threatened with criminal charges related to his testimony before the Senate banking committee in June last year, regarding renovations to the Fed’s historic office buildings in Washington DC.
In a blistering statement, Powell labelled the threat of a criminal indictment as a “pretext” by the Trump administration to pressure the central bank in its interest-rate setting decisions.
He insisted the legal threat was “not about” his testimony last summer, or congressional oversight of the Fed. “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions – or whether instead monetary policy will be directed by political pressure or intimidation,” he said.
Trump is this month expected to announce a nominee to replace Powell, whose term as Fed chair expires in May.
Central bank independence is seen by investors as critical for keeping inflation under control because it allows officials to focus on setting policy to tackle underlying pressures. However, attempts at political interference have been rising after the surge in inflation after the Covid pandemic and Russian invasion of Ukraine, and as advanced economies struggle for growth.
US inflation has fallen back from a peak of more than 9% in 2022, allowing the Fed to cut borrowing costs, with the most recent reduction in December. However, the headline rate of inflation picked up to 3% in September.
Jagjit Chadha, a professor of economics at Cambridge University and former director of the National Institute of Economic and Social Research, said: “If we reduce interest rates too quickly, there is a real danger inflation will jump out of the box again and it really does damage people on low incomes.
“I’ve been thinking about Arthur Burns; the loss of price stability, and rise of inflation in the 1970s. It has implications for the rest of the world.
“If we can’t get dollar inflation under control – don’t forget many, many prices worldwide are set in dollar terms. If they’re also going up as the result of the inability to control inflation, we’ll find ourselves being immiserated. It’s a big problem.”
Trump has repeatedly attacked Powell for refusing to cut borrowing costs more aggressively, calling him a “stubborn mule” and a “numbskull” who he would love to fire. No Fed chair has ever been fired by a president. Trump had repeatedly threatened legal action over the Fed’s renovation project, but on Sunday denied any involvement in the DoJ investigation.
“I don’t know anything about it, but he’s certainly not very good at the Fed, and he’s not very good at building buildings,” Trump told NBC News.
Jason Furman, a Harvard economist who was chair of Barack Obama’s council of economic advisers, said the US was facing a “dangerous moment” amid the transition to a new Fed chair.
“Some countries that have prosecuted or threatened to prosecute central bankers for the purpose of political intimidation or punishment for monetary policy decisions: Argentina, Russia, Turkey, Venezuela and Zimbabwe,” he wrote in a post on X.
US inflation soared above 10% in the mid-1970s amid a series of oil price shocks emanating from conflicts in the Middle East, as well as a relaxed Fed approach and as the US ran large budget deficits.
In a period labelled as the “great inflation”, the headline rate hit a post-second world war high of almost 15% in 1980, leading the Fed under Burns’s successor, Paul Volcker, to drive up borrowing costs in a process to help restore price stability.
