What Happens After The Fed Ceases To Be Independent

Core Points - The Federal Reserve is likely to lose its independence under President Trump's administration, leading to an expansionist monetary policy aimed at lowering interest rates, which poses long-term risks of stagflation and instability in the U.S. economy [2][3][21] - The loss of Fed independence is expected to accelerate a shift in global power dynamics, particularly favoring China, Russia, and India over the U.S. [2][3][30] Group 1: Events and Implications - A Senate confirmation hearing for Stephen Miran, a nominee for the Fed board, raised concerns about presidential influence in Fed decision-making, as he plans to take only a temporary leave from his current position [4][22] - A summit in Beijing involving leaders from Russia, China, India, and North Korea aimed to form an alliance against U.S. power, indicating a shift in global alliances [5][30] Group 2: Monetary Policy and Risks - The Federal Reserve's current federal funds rate is approximately 4.3%, and there are indications that it may soon reduce this rate in response to a slowing labor market [12][21] - The risks associated with a loss of Fed independence include increased run risk, inflation risk, systemic risk, default risk, and currency risk, all of which could lead to a financial crisis [13][14][17][18][19][23] Group 3: Economic Relationships and Deficits - The U.S. federal deficit is around 7% of GDP, and there are warnings that it must decline to 3% within three years to avoid negative impacts on economic performance [32][33] - President Trump's budget increases the federal deficit, which, if sustained, could lead to a significant economic downturn or stagflation due to the fundamental macroeconomic relationship between government deficits, savings, and investment [33]