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The Perils of a Trumped Fed

The US Federal Reserve has spent decades establishing its credibility as an apolitical guarantor of growth and stability. But now that US President Donald Trump has a chance to pack the Fed Board with his own appointees, the institution's tradition of careful, dispassionate economic stewardship could come to a sudden end.

ITHACA – While he attempts to overhaul American tax, trade, and immigration policies, President Donald Trump is mulling over a set of decisions that could prove even more consequential for the US economy. With Federal Reserve Vice Chair Stanley Fischer having retired this month, three of the seven seats on the Fed Board of Governors are now vacant. And in February 2018, Fed Chair Janet Yellen’s first term will end, giving Trump a unique opportunity to stamp his brand on the institution.

Trump’s nominees to fill these positions, and how he goes about choosing them, could have an enduring impact not just on the Fed, but also on the US economy and its central position in the global financial system.

The Fed’s credibility has been methodically and painstakingly established over the course of many decades. A case in point is former Fed Chair Paul Volcker’s decision, in the early 1980s, to hike interest rates and accept a temporary increase in unemployment. Had Volcker not acted, the US would have suffered from spiraling inflation. Volcker’s move induced the short-term pain; but it also bolstered the Fed’s long-term credibility.