Shankul Bhandare
Markets seem comfortable with the prospect of a second Donald Trump presidency, but are they overlooking the risks?
According to Ernie Tedeschi from Yale University, the answer is yes. In a piece for the Financial Times, he highlights “rising political risk” that he believes is being “underpriced by markets.”
Tedeschi, who served as the chief economist at the White House Council of Economic Advisers until March, is particularly worried about the Federal Reserve potentially losing its independence. Testing conducted at Yale’s Budget Lab indicated that a compromised Fed could lead to “profound” economic consequences.
While Trump’s name isn’t directly mentioned in the FT article, it’s implied. Trump appointed Jerome Powell as Fed Chair in 2018, but soon became displeased with his rate hikes, even threatening to dismiss him multiple times.
Powell is likely to cut rates in September, yet Trump is advising against it before November’s election, stating it’s “something that they know they shouldn’t be doing.”
Although Powell’s term as Fed Chair lasts until 2026, there has been speculation that Trump might attempt to remove him earlier, a move that could provoke legal battles and market instability.
Trump recently told Bloomberg he “would let him serve it out,” which was received positively in the media. However, the less-discussed second part of his statement – “especially if I thought he was doing the right thing” – suggests an implicit threat: don’t cut rates in September, and comply with my directives if I return to the presidency.
Powell has previously resisted Trump’s pressures and may continue to do so, but Trump could appoint a more compliant Fed Chair in 2026. The potential loss of the Fed’s independence is significant. Tedeschi is justified in highlighting the increasing political risks.
