Trump's War on the Fed Risks a New Era of Economic Volatility

The U.S. Federal Reserve’s independence has come under scrutiny amid escalating tensions between President Donald Trump and the central bank. Trump recently announced his intention to sack Federal Reserve governor Lisa Cook, a move met with legal threats from Cook, who has vowed to challenge the decision. This confrontation marks a departure from past presidential-Fed dynamics and has sparked concerns about political interference in monetary policy. Trump has consistently criticized Fed Chair Jay Powell, labeling him a “numbskull,” and has demanded rate cuts to stimulate economic growth and reduce government borrowing costs [1]. The Fed, a politically independent body since the 1970s, is designed to operate free from direct presidential or congressional control, a structure intended to prevent short-term economic policies that could destabilize long-term financial markets [1].

The potential politicization of monetary policy poses broader economic risks. Economists warn that premature rate cuts could trigger inflationary pressures, market instability, and higher borrowing costs for consumers and businesses. The Federal Reserve’s credibility as a reliable anchor for global financial stability is also at stake. In 2010, then-Fed Chair Ben Bernanke emphasized how political interference could exacerbate economic volatility by creating “boom and bust” cycles. Such interference could weaken investor confidence in U.S. Treasury bonds, traditionally considered a safe-haven asset, and indirectly raise U.S. government borrowing costs, with cascading effects on global markets [1].

The broader economic outlook has also raised concerns about a potential “stagflation-lite” scenario. Forecasts suggest that President Trump’s aggressive tariff policies are simultaneously pushing up consumer prices and slowing economic growth, creating conditions similar to the 1970s stagflation era—albeit at a less severe scale. According to Moody’s Analytics, core PCE inflation is projected to peak at 3.5% annually, exceeding the Fed’s 2% target but falling far short of the double-digit inflation rates seen in the 1970s. GDP growth is forecasted to remain below historical averages at around 1% per year, signaling a period of subdued economic activity [2]. Analysts like Jeffrey Roach of LPL Financial and RBC Bank economists Frances Donald and Carrie Freestone have described this scenario as a “stagflation-lite” environment—marked by modest inflation and slower growth but not the full-scale economic stagnation of the past.

Financial markets have, for now, responded calmly to the political turbulence. However, the long-term consequences remain uncertain. The Federal Reserve’s ability to act independently will be tested when Powell’s term as chair concludes in May, potentially allowing Trump to appoint a successor aligned with his economic agenda. Economist Mark Zandi has warned that if the Fed is forced to tighten rates aggressively to combat inflation, it could risk slowing growth further—a dilemma reminiscent of the 1980s when high interest rates were used to curb inflation but at the cost of recession [2].

Meanwhile, outside the U.S. political sphere, tokenized equities—a relatively new financial innovation—have attracted growing attention. The World Federation of Exchanges (WFE) has raised concerns about the risks posed by these products, which mimic traditional stocks but often lack the ownership rights and protections afforded to traditional shareholders. Platforms like Robinhood, Kraken, and Gemini have introduced tokenized versions of U.S. equities, drawing in both retail and institutional investors. Binance Research has projected that the market for tokenized equities could reach $1.3 trillion if 1% of global stocks are tokenized, though the sector currently holds only about $360 million in market capitalization. The WFE has urged regulators to expand securities laws to cover these products, highlighting the need for clear ownership and custody rules to prevent reputational damage to traditional markets [3].

Source: [1] Trump vs the Fed: Why this row could rattle the US economy (https://www.bbc.com/news/articles/clydvlx504eo) [2] The Economy Is Headed For Stagflation. But This Time It's ... (https://www.investopedia.com/the-economy-is-headed-for-stagflation-but-this-time-it-s-different-11797206) [3] Tokenized equities could reach $1.3 trillion but regulators ... (https://cryptoslate.com/tokenized-equities-could-reach-1-3-trillion-but-regulators-see-a-ticking-bomb/)