President Trump was forced yesterday to deny that he is planning to fire Jay Powell, the head of the US central bank, the Federal Reserve, but he kept open the possibility of doing that at some later date. Trump has been running a social media campaign against Powell for not cutting interest rates, a move the president thinks would help boost the economy. However, the Fed is very unlikely to do this, as it knows that Trump’s tariff war is going to increase inflation, hence it wants to keep rates higher. 

The markets pay a lot of attention to these things. The dollar fell on the news, with bond yields increasing, which raises the cost of US government borrowing. It all brings to mind the policies of another president – Erdoğan of Turkey. 

Erdoğan has his own mad economic policies. In his case he thinks that higher interest rates cause inflation, when in fact the opposite is true – higher interest rates help to contain inflation. As a result, he kept firing central bank governors until he found one who would do his bidding. 

But eventually, in June 2023, he was forced into an embarrassing volte face, and had to appoint yet another central bank governor who promptly hiked interest rates from 8.5% to 15%, which was actually a smaller increase than markets expected. 

The increase was necessary because the country was in the grip of a cost-of-living crisis, with inflation at almost 40%, the result of Erdoğan’s “unorthodox” economic views. “Unorthodox” in this context meaning “stupid”. 

Which brings us back to Donald Trump, another President with his own theories on how economics really works, all of which are also wrong. His idea of slapping tariffs on pretty much every American import is bound to stoke inflation. The first signs came this week, with a surprise 2.7% increase in prices. 

Only this week a 17% tariff was introduced on Mexican tomatoes – the US imports two thirds of all its tomatoes from its southern neighbour. Apparently, the White House thinks this will boost American tomato production, although who will pick them now ICE is rounding up all the farm workers is another question. The price of tomatoes and all other foods which use them as an ingredient, will now increase. 

Meanwhile Trump is continuously undermining the head of the Federal Reserve. He has accused Powell of doing a “terrible job”, being a “stubborn mule” and a “numbskull”. Although the President probably won’t fire Powell, not least because the markets would probably crash if he did, Trump is planning to replace him next year when his term is up, doubtless with an obedient lackey who will be told to cut interest rates as prices are rising. Sound familiar? 

Even if inflation never gets to Turkish levels, Trump is playing with fire. The absolute independence of the Fed is a cornerstone of US economic policy – or it has been until now. Regardless of the party in power or the makeup of the Federal Reserve’s board, its independence has been seen as one the main reasons why American economic policy could be trusted. 

Trump is undermining that independence so he can pursue a doomed economic policy for short term political advantage. Once the Fed’s reputation is gone it will be very difficult to get back. What law can you introduce to stop another Trump-like president undermining the central bank all over again? There is none. 

Just look at Turkey if you want to see the consequences of uncontrolled economic stupidity in power. The Turkish economy is not large enough to act as a drag on other nations when it goes into a slump. But we will all suffer if Trump takes over the Federal Reserve – and at that point, there would be nothing anyone could do to stop him.