We’re becoming a Döner Republic
Trump’s move to crush the Federal Reserve’s independence is a first step toward becoming an economic basket case like Turkey.
Over the last few years, the nation of Turkey has served as the global poster child for how a country’s economy can fly off the rails when a strongman leader decides to crush his central bank’s independence. Thanks to Donald Trump’s latest power grab — attempting to fire a Federal Reserve governor — the United States may be taking its first true stride down a similar path.
In 2021, President Recep Erdogan fired the head of his country’s central bank, who had attempted to raise interest rates in order to combat the fast-rising consumer prices that had dogged the country for several years, replacing him with a political ally. He then successfully pressured the bank to cut rates instead, while canning more of its officials.
Erdogan was motivated in part by a set of deeply heterodox economic views: He has argued that increasing interest rates raises inflation, in part because businesses have to bump up prices in order to cover their borrowing costs. This view, known in academia as “neofisherism,” is widely rejected by most economists, who believe that raising rates reduces inflation by cooling off economic activity.
The results of this experiment were unambiguous and ugly: Annual inflation quickly spiked from around 20% to over 80%, and the country has struggled to contain it since. Could the United States really become the next Turkey-like basketcase, a Döner Republic, if you will?
Trump was elected on a wave of international fury over inflation that papered over his many, many flaws. But while the populist right has managed to seize the political moment, its economic policies threaten to undermine the entire basis of their appeal.
On Monday evening, the president escalated his long-running war with the Federal Reserve by moving to fire one of its governors, Lisa Cook, citing unproven allegations that she committed mortgage fraud. Cook has said she will not step down, arguing that Trump had “no authority” to remove her under federal law, and on Tuesday the Fed issued a statement that she would seek a restraining order against the administration. The brewing legal battle result will determine whether the Fed will continue to enjoy insulation from political interference or end up under the president’s thumb, independent in name only.
Mainstream economists have long viewed central bank independence as the basic bedrock of economic stability. Without protection from meddling politicians, they argue, leaders will pressure central bankers to keep interest rates low in order to juice the economy and keep down borrowing costs, leading to out-of-control inflation.
In the U.S., the most famous cautionary tale has long been Fed Chair Arthur Burns, who is believed to have kept rates low thanks to arm-twisting by President Richard Nixon in the leadup to his 1972 re-election campaign, a decision that helped set off the decade’s grinding stagflation crisis. Looking globally, economists have long found that countries with more independent central banks enjoy lower inflation.
Trump’s monetary policy preferences seem like a recipe for higher inflation. The president has berated Federal Reserve Chair Jerome Powell, urging him to lower interest rates, despite the central bank’s concerns that the administration’s tariffs could put upward pressure on consumer prices. He seems to be doing so in part out of a desire to lower mortgage costs and give the economy a jolt.
But Trump has also made it clear he thinks the Fed should lower rates in order to keep federal borrowing costs low. “If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost,” he recently posted on Truth Social.
That’s the sort of thing that makes economists’ and central bankers’ blood run cold: After all, once you’re keeping interest rates low in order to make borrowing cheap for the government, you can’t use them to keep prices in check. The technical term for this sad state of affairs is “fiscal dominance,” and it’s the kind of thing that can lead to much higher long-term inflation and potentially a rapid spiral.
Firing Cook would not bring about catastrophe overnight. The concern is that removing her would blow a massive hole in the legal wall of protection that Congress erected around the Fed to safeguard its independence, making the prospect of an Ankara-esque disaster down the line something we’d have to contemplate seriously.
The Fed’s autonomy is supposed to be protected in multiple ways. But most crucially of all, the Federal Reserve Act states that members of its Board of Governors can only be removed “for cause.”
What does that mean? Unfortunately, Congress didn’t define the term. But the long-running assumption has been that it covered instances of true malfeasance or an inability to do the job (say, because you were showing up to committee meetings sloshed). The issue has never been put to test in the courts, because no president has ever tried to remove a Fed governor before.
With Cook, Trump has seized on the thinnest of legal pretexts. He has accused her of possibly committing mortgage fraud when she purchased homes in Michigan and Atlanta and claimed on the loan paperwork that each would be her “principal residence.” Cook has not been found guilty of any actual wrongdoing; Bill Pulte, the head of the Federal Housing Finance Agency, has simply made a criminal referral to the Department of Justice. Nor is it at all clear that what she’s been accused of is actually illegal.
Todd Phillips, a professor of financial and administrative law at Georgia State University, told me that if the courts accept Trump’s rationale, it would effectively obliterate the promise of independence Fed officials currently enjoy, making it far easier to pressure them, or swap out recalcitrant members.
“If for-cause can be whatever trumped-up allegation the president can make, it renders the for-cause protection meaningless,” he said. ”If that’s all it takes, just a letter asking the DOJ to investigate, Bill Pulte can allege anything about anybody he wants, and the president can use that as justification to fire them. And that’s not a plausible reading of the [Federal Reserve Act].”
One piece at a time, Trump has been systematically undermining the pillars that keep the U.S. economy functioning. He’s replaced formal trade agreements with an ad hoc system of tariffs that change by the day. He’s fired the head of the Bureau of Labor Statistics and nominated an unqualified political flunky to replace them, raising questions about the future accuracy of the government’s jobs data. Now, he’s taking steps to consolidate power over the world’s single most-important financial institution, whose actions underpin the U.S. and global financial markets.
I hear Turkey is lovely. But I don’t think many Americans would be thrilled to follow in its path.