Summers says Trump putting Fed on verge of ‘credibility crisis’
Former Treasury Secretary Lawrence Summers warned that while financial markets have so far shown limited concern with regard to the Federal Reserve’s independence, the situation “could turn very quickly.”
“We’re on the foothills of a credibility crisis” with regard to the Fed, Summers said on Bloomberg Television’s Wall Street Week with David Westin. “We are in completely unprecedented territory.”
Summers cited President Donald Trump’s demands that the Fed cut interest rates by some three percentage points – “which no economist anywhere has endorsed” – along with his “harsh rhetoric” criticizing central bank Chair Jerome Powell. He also highlighted Trump’s efforts to remove Governor Lisa Cook “with no kind of due process” and reporting on a scenario where Trump appointees attempt to revamp leadership of Fed district banks.
“This is an attack on the governance of the institution,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. As for an outright crisis of credibility, “we’re not there yet because people believe that, ultimately, U.S. institutions endure and succeed.”
Summers criticized Republicans for being silent in the face of “the wholesale politicization of the Fed.” That contrasts with “a long tradition of distinguished Republican leaders who have stood up for the importance of inflation credibility” and Fed independence. “I particularly admired Senator Pat Toomey,” he said, referring to the retired former top GOP member of the Senate Banking Committee.
Financial Community
Today’s silence “is really disturbing,” Summers said. He also called out leaders in the financial sector for spending more time criticizing Zohran Mamdani, the democratic socialist candidate for mayor of New York. The former Treasury chief said he suspects “the price of opposition” to the president being jacked up by the panoply of tactics the president has used against critics.
Summers also said he was worried that “highly irresponsible behaviors are being normalized by what the president is doing” and about the failure of “the establishment” resisting and calling out Trump’s actions.
“There hasn’t yet been a dramatic market reaction” with regard to Trump’s Fed maneuvers, although some indications of concern have emerged, Summers said.
The yield premium of 30-year Treasuries over 10-year notes touched around 70 basis points this week, the highest level since the start of the inflation surge in 2021. Thirty-year bonds are particularly sensitive to long-term inflation expectations, which could rise if investors believe the Fed will prioritize keeping its short-term benchmark rate low even at the risk of higher price increases over time.
“We are playing with fire in terms of inflation expectations,” Summers said. “We haven’t seen substantial reactions in markets yet. But this could turn very quickly if the psychology changes.” He also noted that large U.S. fiscal deficits put additional pressures on financial markets.