American economist Paul Krugman stated that United States President Donald Trump is “Venezuelanizing” the country after opening a criminal investigation against the president of the Federal Reserve (Fed, the US central bank), Jerome Powell. According to him, the new attack is an intimidation to all members of the monetary authority and anyone contrary to the Republican’s agenda, but it could turn against Trump, without cutting short-term interest rates and higher long-term rates.
“This is all about intimidation, not just from Powell, but from everyone at the Fed,” the 2008 Nobel Prize winner said in a post titled ‘Trump is Venezuelaning the United States’ on Tuesday. “This isn’t just about the Fed. It’s part of a broader attack on anyone who doesn’t agree with Trump’s agenda,” he adds.
Krugman cites the manifesto of former president and Fed members in defense of Powell. In their position, they state, they denounce the Department of Justice’s instrumentalization against the central banker and say that this is how “monetary policy is carried out in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly”.
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Commenting on the manifesto, Krugman states: “emerging markets with weak institutions’ means Third World nations like Venezuela – or, as Trump would say, shithole countries”. He adds that although Trump proclaimed himself “interim president of Venezuela” over the weekend, he is “definitely not.” “But he is Venezuelaning the United States”, he reinforces.
For the 2008 Nobel Prize winner, in the case of the Fed, Trump’s ‘shot’ could ‘backfire’ for three reasons. Firstly, interest rates should not fall in the short term. “The Fed will be reluctant to cut rates, even though it might make sense, so it doesn’t look like (Trump’s) intimidation is working,” says Krugman.
This reluctance, he says, will persist even after Trump chooses a new Fed president. Powell’s term ends in May 2026. Krugman remembers that interest rates are set by the Federal Open Market Committee (FOMC), not by an individual, and most of the committee’s relevant members are not appointed by Trump.
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Krugman’s second point is that even a politicized central bank can only reduce short-term interest rates temporarily. “As inflation increases, the bank will eventually be forced to increase rates more than they were at the beginning”, he states, citing as an example the case of Turkey, which saw its inflation soar to 80%.
Finally, the economist warns that attacking the Fed’s independence could push long-term interest rates, which are what matter for the economy, upward. “Bond investors understand that political pressure on the Fed will eventually mean higher short-term interest rates,” he explains.
According to Krugman, although long-term rates in the US did not move much after the attack on Powell was revealed, they “rose slightly”.
He further claims that if senior members of the Trump administration, such as US Treasury Secretary Scott Bessent and US National Economic Council Director Kevin Hassett, candidate to replace Powell, had “any integrity”, they would have threatened to resign en masse as soon as the criminal investigation against Powell was revealed. “But they don’t have it and they didn’t do it,” he says.
In his post, Krugman also publishes a photo of Renee Nicole Good killed by US Immigration and Customs Enforcement (ICE) last week, and says that this incident and the renewed attack on Powell are part of the same story: “Trump and his followers have zero tolerance for dissent”, he concludes.
