This episode illustrates the Fed’s power — power that must be insulated from abuse by politicians, especially politicians like Donald Trump.

Over the past several days Trump has been demanding that the Fed cut interest rates and calling for the Fed chairman’s “termination.” It’s worth looking at what he posted on Truth Social to get a sense of how, to use the technical term, batshit crazy he is on this subject:

And we really, really don’t want someone that crazy dictating monetary policy.

The reason we don’t want politicians in direct control of monetary policy is that it’s so easy to use. After all, what does it mean to “ease” monetary policy? It’s an incredibly frictionless process. Normally the Federal Open Market Committee tells the New York Fed to buy U.S. government debt from private banks, which it does with money conjured out of thin air. There’s no need to pass legislation, place bids with contractors, deal with any of the hassles usually associated with changes in government policy. Basically the Fed can create an economic boom with a phone call.

It's obvious that this kind of power could be abused by an irresponsible leader who wants to preside over an economic boom and doesn’t want to hear about the risks. This isn’t a hypothetical scenario. Consider what happened in Turkey, whose Trump-like president, Recep Tayyip Erdoğan, recently arrested the leader of the opposition. When the global post-Covid inflation shock hit, Erdogan embraced crank economic theories. He forced Turkey’s central bank, its equivalent of the Fed, to cut interest rates in the belief, contrary to standard economics, that doing so would reduce, not increase inflation. You can see the results in the chart at the top of this post.

How can we guard against that kind of policy irresponsibility? After the stagflation of the 1970s many countries delegated monetary policy to technocrats at independent central banks. Can the technocrats get it wrong? Of course they can and often have. But they’re less likely to engage in wishful thinking and motivated reasoning than typical politicians, let alone politicians like Trump.

What makes Trump’s attempt to bully the Fed especially ominous is the fact that the Fed will soon have to cope with the stagflationary crisis Trump has created. Trump’s massive tariff increase will lead to a major inflationary shock:

Moreover, Trump has also created huge uncertainty by radically changing his policies every few days, which will depress spending and may well cause a recession:

Not incidentally, Trump has been able to pursue these destructive policies because U.S. law gives the president enormous discretionary power over tariffs. And now he wants the same kind of discretionary power over the Fed.

As a consequence of Trump’s destructive tariff regime, the Fed will soon face a dilemma. Should it raise interest rates to fight inflation, or should it cut rates to fight recession? It’s a really hard call, and it’s quite possible that Jay Powell will get it wrong. Trump has made Powell’s dilemma even worse with his attempted bullying, because a rate cut would be seen by many as a sign that Powell is giving in to avoid being fired.

But one thing we know for sure is that we don’t want Trump making that call. Like Erdogan, he has embraced crank economic doctrines to justify his policies, in Trump’s case the ludicrous claim that tariffs won’t raise consumer prices. Does anyone doubt that when inflation rises, he’ll dismiss it as “fake news”?

So will Trump’s attempt to bully the Fed succeed? According to the Wall Street Journal, he has spent months talking privately about firing Powell. He doesn’t have the legal authority to do that, but Trump doesn’t worry about pesky things like legal limits to his authority. Yesterday he told reporters that he can easily get rid of Powell: “If I want him out, he’ll be out of there real fast, believe me.”

And given how quickly Trump has been able to subvert or destroy many other government institutions, it’s hard to feel confident that he can’t do the same to the Fed. Fear of market reaction — America is already facing a serious credibility problem, with the dollar falling even as interest rates rise — will probably restrain him, but he may not believe people telling him that taking over the Fed would cause the dollar to plunge while long-term interest rates soar as investors expect higher inflation.

Between Trump’s tariffs, the economic spillover from deportations and terrorization of immigrants and the attempt to politicize the Fed, the upside risk to inflation now looks very high. The bitter irony is that many Americans voted for Trump because they thought he would bring prices down.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack, where he now posts almost every day.