Bloomberg Tackles Four Scenarios for Fed Pressure

The Federal Reserve’s independence has come under mounting political pressure from U.S. President Donald Trump.

While there could be a short-term boost, gains would come at the expense of eroded credibility, higher inflation expectations, risks to financial stability, and increased fiscal servicing costs in the long run.

He has repeatedly criticized Fed Chair Jerome Powell for not lowering interest rates and most recently called on Governor Lisa Cook to resign, following mortgage fraud accusations from Federal Housing Finance Agency Director Bill Pulte.

Cook has said she will not be “bullied into stepping down,” Bloomberg Weekend reported.

Bloomberg examined scenarios showing how threats to the Fed’s independence could affect the U.S. economy.

While there could be a short-term boost, inflation and term premia would ultimately rise, leading to faster price gains and higher interest rates.

The four scenarios considered were:

• Higher inflation target: Raising the Fed’s target from 2% to 4%.

• Greater sensitivity to employment: Increasing focus on maximum employment while reducing responsiveness to inflation deviations.

• Politically convenient assumptions: Adopting a view that the natural rates of interest and unemployment are lower than current estimates.

• The “Trump scenario”: Lowering the policy rate to 1% regardless of economic conditions, in order to appease the president.

Across these scenarios, the near-term macroeconomic impact looks superficially positive, with stronger GDP growth and a lower unemployment rate.

But those gains would come at the expense of eroded credibility, higher inflation expectations, risks to financial stability, and increased fiscal servicing costs later on, according to Bloomberg Economics’ Anna Wong and Jamie Rush.