Fed Independence
- The biggest source of risk to the US economy is the loss of Federal Reserve independence. Trump said the benchmark federal funds rate should be reduced from its current 4.25-4.5 per cent range to around 1 per cent. What is less clear is whether this represents the firm policy intention of the President, or whether this is just a political distraction, or a way to blame someone else for any pain arising from the new tariffs. If money markets come to the view that the Federal Reserve was not taking sufficient action to bring inflation to target, bond yields would rise in line with long-run inflation expectations (regardless of the Federal Reserve policy rate), and the cost of sustaining the US national debt could increase significantly.
