The Fed, Tariffs & Big Beautiful “Sequel.”

The racist asshole in the Oval Office is attempting to fire Lisa Cook from the Board of Governors of the Federal Reserve (Fed). Dr. Cook graduated from Spelman College and went on to get degrees from Oxford in philosophy, politics and economics as a Marshall Scholar and a PhD from UC Berkeley but has the distinction of being a Black woman in Trump’s America. So she had to go.

Cook’s dismissal came on the heels of another Fed departure this summer when Dr. Adriana Kugler, a Latina woman, resigned rather than remain in the line of fire. Now, Dr. Cook isn’t going down without a fight as she is suing the Trump administration for wrongful termination so we’ll see what happens. But Kugler’s resignation had already opened the door for Stephen Miran to take her place pending Senate confirmation, which is a slam dunk for the architect of Trump’s reckless tariff policy.

The Fed is supposed to be an independent body but Trump has made no secret of his desire to stack the board with loyalists to politicize its policies and maneuvers. Say what you like about the Federal Reserve—and I have a lot to say about it—but the last guy you want directing traffic over there is Donald Trump.

So let’s talk about what Trump is really after here by trying to take over the Fed.

Setting up the Knock-Out

Taking over the Fed is a key part of a three punch combination the GOP and Trump have planned to bring down the federal deficit; all to preserve the historic tax cuts for the wealthy in this country.

Now the first part is already happening and that’s to use the tariff revenue to pay down debt despite Trump’s original claim that tariff revenue could be so huge that he could send checks to every American.

The second part is in formation and also pretty easy to explain. The third part is going to take a bit more time. But the plan is very much in the works. Just know that every part of this plan is designed to make you pay for the tax cuts enjoyed by the wealthiest citizens of this country and the corporations that control the real economy and political economy.

The Board of Governors of the Fed is a seven-person board. The chair is selected by the President but this person has to be a sitting governor at the time of selection. So Trump is trying to accomplish a couple of things. The first is to make sure he has someone there who will do his bidding as the chair. But the chair isn’t the sole arbiter of rates so Trumps wants to surround his selection with as many governors as possible.

In the ever important decision of rate cuts or rate hikes, however, there are others to consider. There are twelve members of the Federal Open Market Committee (FOMC) who determine rate moves. The seven from the Board of Governors, the head of the New York Federal Reserve (who has a permanent voting stake), and a rotating four-member committee from the other Reserve Banks around the country.

As it stands, governors Michelle Bowman and Christopher Waller are both Trump appointees who are considered loyalists. Miran, if confirmed, would be a third. A fourth appointment in Dr. Cook’s place would give Trump complete control over the Fed Board of Governors.

While they would still need consensus in the FOMC to set rates, there’s a lot the board can accomplish with a majority from appointing heads of the reserve banks, drafting banking regulations and determining bank deposit requirements.

We already lost the Supreme Court for a generation to Trump appointees. If he convinces Thomas and Alito to step down it could be another generation (if the country lasts that long). Gaining control over the Federal Reserve and politicizing it in the same way as the courts would be similarly catastrophic. Our judiciary and economy would bear Trump’s mark long after he’s gone.

With respect to tariffs—the opening shot of the combination—Treasury Secretary Scott Bessent has reversed course on Trump’s promise to issue a check to every American from all the tariff revenue. Instead, the secretary confirmed that the administration is planning to use these funds to pay down the federal debt. It’s hard to say whether he’s gaslighting us or truly doesn’t understand what he’s suggesting.

Tariffs are basically taxes on the American people. They aren’t paid by other countries, they’re paid by the companies in the United States that import goods from other countries. To assume that these tariffs can continue unabated without bleeding out the economy is…well, stupid.

We’ve already seen from the Producer Price Index (PPI), that inflation is hitting the corporate level and core inflation through Personal Consumption Expenditures (PCE), is also rising. This is proof positive that we are indeed bearing the brunt of the tariffs so this is just a shift of the tax burden from the wealthy to the rest of the country. The Trump administration repeating the claim over and over that export nations are bearing the cost of tariffs doesn’t make it true.

There are only two ways this can go:

1. Tariffs push inflation so high that the economy craters, in which case GDP reverses, tax revenues decline and unemployment claims rise. This increases the deficit. So the hole in the bucket would pour more money out than tariff revenue coming in. Or…

2. In an effort to prevent the economy from cratering, they stop this tariff nonsense and the tariff revenue dries up.

Either way, the result is the same. Using tariffs for deficit control doesn’t work. But here we are.

The second punch in the combination is what’s being referred to as the “Big Beautiful Sequel.”

The Republicans have formed a working group led by Texas Congressman August Pfluger to craft model legislation that will cut more from Medicaid and student loan assistance.

This is sheer madness.

The existing cuts to Medicaid are already going to decimate the lower end of the economic spectrum and obliterate red state budgets. As it is, bankruptcies in the United States are up 11.5% in the past year, with medical debt being the leading cause of personal fillings. Student debt default rates are at an all-time high.

So not only is everything going to be more expensive on the consumer from the tariff war he’s waging, but they’re going to punish the poor and working class even more by taking away entitlement relief measures that prevent economic devastation. All to pay for tax cuts.

And that brings us to the knock out punch.

This part is a bit trickier to explain because it’s a fantastical scheme that hasn’t been run in this country in 75 years. And when we ran it the first time, it pushed inflation above 20%, which is why we stopped doing it.

The Knock Out Punch

So, part one of the plan is to use tariff revenue to pay down debt. Part two is to try and pass another reconciliation bill that cuts even further into social safety net spending. So this brings us back to the Fed. Let’s talk about why it’s so important to Trump.

It’s fairly obvious that the tariff war and another Big Beautiful Bill will fail to contain the ballooning deficits. So if they insist on preserving tax cuts, they’re going to have to print a shit ton of money. And there are only two ways to do it, both involving the Fed.

The Fed has two superpowers: making money and setting rates. It uses these weapons to influence what it refers to as its dual mandate—optimal employment and reasonable inflation. In normal economic periods (whatever that means anymore) the Fed can use these weapons to cool off the labor market or spur hiring. It can increase or cool inflation through interest rates or increasing or limiting the money supply. But every so often, like stagflation in the 1970s or post world war two, which is where we’re headed today, there are circumstances in the broader economy that upend these norms.

We’re in one of those periods right now.

After a decade of printing money and even longer keeping rates close to zero, the Federal Reserve poured money through the economy to prevent another Great Depression after the Global Financial Crisis (GFC). But the GFC led to high unemployment and low inflation, which meant the Fed was keenly focused on the employment part of the equation. By flowing money through the system and keeping rates artificially low, it was trying to spur hiring which would in turn increase demand, thereby spurring modest inflation. From the lows of the GFC, it made sense to act this way.

But along the way we did some other things. First off, we conducted two foreign wars under Bush, Obama and Trump 1.0 before finally winding things down under Biden. But we never stopped funding the military and that money had to come from somewhere. We also gutted the revenue base starting under Bush and that never stopped. Not under Obama, Trump or Biden, and we just gutted it even further in the Big Beautiful Bill Act.

As a result of egregious money printing and running up absurd deficits to pay for the war machine and to line the pockets of the wealthy, we got the obvious results: a massive federal debt from skyrocketing annual deficits.

Then came the inflation spike under Biden after we printed even more money under both Trump and Biden. So the Fed decided to increase rates to cool inflation with the hope that it wouldn’t negatively impact the job market. And for a little while, it seemed to be working and that we were headed for the “soft landing” that we’ve heard so much about.

As much as we talk about Fed superpowers, the agency itself is not all powerful. It can’t do it all. And while it’s independent of the federal government, there has to be coordination to an extent for a holistic economic framework to take root. Fed monetary policy has to work in conjunction with government fiscal policy. The problem we have today is that our fiscal policy is so upside down and geared toward defending the top rung of the economic ladder that it neutralizes much of the monetary power of the Fed.

For example, Fed quantitative easing ostensibly saved us from a second Great Depression by backstopping the banking system and providing liquidity through direct lending, purchasing toxic assets and providing financial arbitrage through its reverse repo facility—essentially allowing banks to borrow cheap money and reinvest it in higher yield treasuries. The problem is that they continued this for far too long, and though they tightened regulations and deposit requirements on the banks, these regulations and activities didn’t extend to the corporate class. As much as we like to villainize banks, it wasn’t the depository institutions that got away with murder as much as it was highly leveraged hedge funds, investment banks and investment arms of large corporations.

To understand how Trump is interpreting this moment and the powers at his disposal, let’s talk about where money comes from. The Fed makes the money and the Treasury pays the bills and raises debt to cover the gaps when we have deficits. Pretty straightforward.

When there’s more money outside of the government than inside of it after the Fed prints it, it only has a few places to accumulate.

• Your bank accounts and personal assets.
• Corporate bank accounts and assets.
• The Federal Reserve’s account.
• And deposits in U.S. banks.

Let’s take them one by one.

The bottom 50% of the country is in massive debt so it’s not in bank accounts, though some of it is in retirement accounts and assets like homes. But most people are upside down. The top half has slightly more wealth than debt, though most don’t have enough to retire comfortably. So in the consumer part of the equation, it’s the top 10% that have most of the surplus wealth and cash.

Next we have corporations. It’s estimated that U.S. corporations are sitting on around $3–$5 trillion in cash and marketable securities. So, there you go.

Then you have the Fed’s reserve funds and U.S. banks. I’m lumping them together because they’re tightly interconnected.

Currently, the Fed has a $500 billion reserve in a facility (repurchase or “repo” market) because every so often it has to inject liquidity into the overnight settlement markets. But it also has a reverse repo facility it uses to store excess cash that it then lends to banks at a set rate. When rates were low and liquidity was a concern during COVID and the inflation crisis, the Fed kept a lot of money here because it was a secure facility for banks to park money with interest. For the first time in several years, this account is essentially depleted.

Now, that’s not a reason to freak out. This means that banks are getting a better deal elsewhere. Namely, U.S. treasuries. Like I said, Fed deposits and bank deposits are tightly interconnected so what matters is that there’s liquidity in the system, regardless of which entities are actually holding onto the deposits. Essentially, U.S. banks are scooping up U.S. treasuries because the yields are higher than what the Fed was paying in interest.

All told right now, U.S. banks own about $600 billion in short-term treasuries and about $3.5 trillion in long-term treasuries. So our banks hold a significant amount of our government’s outstanding debt. For the record, this isn’t necessarily a good sign.

Now let’s game this out a bit to light the path forward for Trump.

The administration has a bit of a problem. We cover our deficits by issuing debt through the treasury markets. But the yield on our long-term treasuries is high. Like, really high. So it’s compounding the debt problem.

Why are yields so high? Because the whole world thinks we’re crazy and can’t sustain our deficit spending.

To everyone else, it makes no sense why we continue to maintain a trillion dollar military budget and provide tax cuts to the only people who could actually afford to pay them. And the tariff war put everyone over the edge. So now we have to pay everyone more on our debt because they see the American economy coming apart at the seams.

When things fall apart the credit market tightens even more and defaults go up. This leads to a vicious cycle that lasts anywhere between 12 and 36 months before the economic cycle reboots. Now, in prior (normal) periods that’s when the government steps in with fiscal measures to increase unemployment insurance and backstop healthcare coverage, maybe even issue stimulus checks. But none of that is on the Trump agenda.

That leaves monetary policy to get us out of a deep recession. But the Fed is out of money because it’s all sitting in the banks. And the banks will need those deposits to maintain minimum balance requirements and to offset losses from growing defaults. Therefore, if the Fed wants to pour money through the system it has to make more of it.

Here’s the rub. If it just prints more money then it devalues the currency, and that means more inflation. Trump would counter this by saying the economy will be hot when interest rates are lower. But lowering interest rates to encourage more lending doesn’t matter if credit is tight, defaults are up and consumers don’t have any money. Besides, the number one asset people possess is their home and mortgage rates are tied to the long-term treasury rates, not the Federal Funds rate.

And that’s why the so-called normal Fed intervention methods won’t work anymore.

So what do they do? My guess is you’re going to start hearing a term that hasn’t been used in a very, very long time. Something called Yield Curve Control (YCC). This is where the Fed sets a yield range for the Treasury to issue short-term notes; a massive amount of short-term notes at a lower interest rate to help refinance all of the outstanding debt at a lower rate. The problem is the rest of the world sets the rates through auctions, especially impacting the longer term yields.

As we saw from the August auction, just because we’re offering them at a certain rate doesn’t mean the world is going to buy them at that.

This is what we did after World War Two. During the war we ran up massive deficits and the national debt ballooned. So the government’s fiscal approach was to increase taxes on the wealthy. The top marginal tax rate following the war was 90% and the wealthy at the time had no problem paying it because they saw it as their patriotic duty. Our wealthy people have no such allegiance to the country.

Here’s how YCC works.

If the market decided that the yields weren’t high enough and didn’t purchase enough treasuries as a result, the Federal Reserve stepped in to over-purchase thereby driving the yields down. It’s a temporary fix that amounts to back door money printing, so eventually it causes inflation. That’s how we wound up pushing 20% inflation following the war. It was also seen as politically motivated and economically irrational after it went on for a few years, so the high taxes remained but we eventually backed off this monetary policy.

Today’s economic environment is very different from the burgeoning manufacturing economy of the 1940s and ‘50s. So it’s plausible that our tools will work differently today, though not likely. Printing money is printing money.

Where the Money Really Is

Our muscle memory probably suggests that an economic collapse will look more like the GFC when the mortgage crisis bled out and took down the global economy. In that case, quantitative easing did stem the bleeding but it failed to address the systemic issues that plagued the U.S. economy. We also don’t have the same liquidity issue that we had in 2008, so quantitative easing isn’t necessarily the right prescription for what comes next.

Instead of printing money, the better bet would be to reclaim some of what’s already out there. It wouldn’t hurt to end this tariff war, repair our relationships with allies and foes alike, cut the military industrial complex in half (or more) and start reinvesting in the American infrastructure and the American people. But…

Corporations are sitting on $3 to $5 trillion.

They don’t want to touch that.

Wealthy individuals and multinational U.S. corporations are parking $4 trillion dollars in offshore accounts.

They don’t want to touch that.

U.S. banks are sitting on $3.5 trillion in cash and marketable securities.

They don’t want to touch that.

So where are they going to try to get the money to cover for the tax cuts even though we know where it’s all sitting?

From us.

And when that stone can’t give any more blood, they’re left with no choice but to print gobs of money, which will increase inflation, or to purchase all the treasuries in the market to drive down yields, which will increase inflation.

But, hey. At least those tax cuts will be preserved.

Here endeth the lesson.

Image Source

• The White House, Public domain, via Wikimedia Commons. Changes were made.