American economist Paul Krugman stated that the United States president, Donald Trump, is “Venezulizing” the country after the opening of a criminal investigation against the president of the Federal Reserve (Fed, the U.S. central bank), Jerome Powell. According to him, the new attack is an intimidation of all members of the monetary authority and of anyone opposed to the Republican’s agenda, but it may backfire on Trump, with no short-term rate cuts and higher long-term rates.
“All of this is about intimidation, not only of Powell but of everyone at the Fed,” said the 2008 Nobel laureate, in a post titled ‘Trump is Venezuelanizing the United States,’ on Tuesday. “This isn’t just about the Fed. It’s part of a broader attack on anyone who does not agree with Trump’s agenda,” he adds.
Krugman cites the manifesto of the former president and Fed members in defense of Powell. In the statement, they denounce the instrumentalization of the Department of Justice against the central banker and say that this is how “monetary policy conducted in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly” is done.
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Commenting on the manifesto, Krugman states: “emerging markets with weak institutions” means Third World nations such as Venezuela — or, as Trump would say, “shithole countries.” He adds that, although Trump has proclaimed himself the “interim president of Venezuela” over the weekend, “he certainly isn’t.” “But he is Venezuelanizing the United States,” he reinforces.
For the 2008 Nobel laureate, in the case of the Fed, Trump’s ‘shot’ could backfire for three reasons. First, rates should not fall in the short term. “The Fed will be reluctant to cut rates, even if it might make sense, in order not to appear that Trump’s intimidation is working,” Krugman says.
That reluctance, he notes, will persist even after Trump selects a new Fed chair. Powell’s term ends in May 2026. Krugman recalls that 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.
The second point is that even a politicized central bank can only reduce short-term rates temporarily. “As inflation rises, the bank will eventually be forced to raise rates more than they were initially,” he says, citing Turkey as an example, where inflation surged to 80%.
Finally, the economist warns that attacking the Fed’s independence could push long-term interest rates, which are the rates that matter for the economy, higher. “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 U.S. have not moved much after the Powell attack was revealed, they “rose slightly.”
He also states that, if high-ranking Trump officials, such as the U.S. Treasury Secretary, Scott Bessent, and the director of the National Economic Council of the United States, Kevin Hassett, a candidate to replace Powell, had “some integrity,” they would have threatened to resign en masse as soon as the criminal investigation into Powell was revealed. “But they do not have it and did not do so,” he says.
In his post, Krugman also posts a photo of Renee Nicole Good killed by the U.S. Immigration and Customs Enforcement (ICE) last week, and says that this event and the renewed attack on Powell are part of the same story: “Trump and his followers have zero tolerance for dissent,” he concludes.
