There could not be a worse time for Donald Trump’s pick to take over as chair of the Federal Reserve from Jerome Powell, with economic indicators trending towards a possible interest rate increase at a time when the president expects cuts.
That is according to Nobel prize-winning economist Paul Krugman, who wrote on his Substack on Wednesday that newly-appointed Kevin Warsh may find himself as the lone vote opposing a rate increase, or leaving the current rate in place until the next meeting.
And that could cause him problems with an easily aggravated Trump.
The economic outlook has deteriorated sharply since Trump returned to office. The 30-year interest rate sits at nearly a 20-year high, and the 10-year bond rate has spiked significantly since the Iran war began, with Krugman pointing out, “Interest rates are up because inflation, which was declining until Trump returned to the throne.”
“Until now, markets have been complacent about the implications of the Iran war. Investors have allowed themselves to be lulled by Trump’s repeated assurances that either victory or a negotiated settlement were just around the corner. But they are now waking up to the reality of the debacle,” Krugman explained.
The economist suggested Warsh’s job, as Trump sees it, is to support him politically by cutting interest rates regardless of economic evidence, and Warsh will face especially intense pressure to deliver lower rates because rising interest rates will deepen public anger over Trump’s economic mismanagement.
Surging gas and grocery prices have already devastated Trump’s economic approval ratings. Rising mortgage and car loan rates will intensify that pain and tilt the economy toward recession, which led Krugman to half-jokingly predict, “So I’m sure we’ll see many ALL CAPS posts from Trump demanding drastic interest rate cuts NOW NOW NOW.”
However, markets are signaling that most Federal Reserve monetary committee members will either vote to raise rates or leave them unchanged, according to the data Krugman presented. This creates an impossible scenario for Warsh: either repeatedly lose votes and lose institutional credibility, or defy Trump and face presidential fury.
“Will Warsh start his tenure by being repeatedly outvoted, rapidly losing credibility within the institution he’s supposed to run? Or will he, as Trump will surely see it, betray his master?” Krugman asked before concluding, “One thing is clear: The markets are finally waking up. And the economic and political fallout from Trump’s decision to emulate his idol Putin by launching what he believed would be a short, victorious war is just getting started.”
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