THE FED, THE FUND, AND THE BANK IN TRUMP´S CROSSHAIRS / PROJECT SYNDICATE

The Fed, the Fund, and the Bank in Trump’s Crosshairs

Unlike during his first term, US President Donald Trump no longer seems to care if his policies wreak havoc in financial markets. This time around, Trump seems to be obsessed with his radical approach to institutional deconstruction, which includes targeting the Federal Reserve, the International Monetary Fund, and the World Bank.

Barry Eichengreen

BERKELEY – During his first presidential term, Donald Trump took a relatively light-touch approach to the Federal Reserve, the International Monetary Fund, and the World Bank. 

He jawboned the Fed to reduce interest rates but did not demand that it clear its decisions with the White House or otherwise seriously challenge its independence.

At the World Bank, he installed David Malpass but otherwise left the institution untouched. 

He kept David Lipton, an adviser to Democrats, in place as the IMF’s number two official, an appointment that is traditionally the prerogative of US presidents.

Trump’s reluctance to move against the Fed reflected a recognition that financial markets would react negatively to a president tampering with monetary affairs. 

And Trump clearly cared about financial markets, publicly gauging his success by the trajectory of stock prices.

The IMF, for its part, served a useful purpose. 

Expensive problems in emerging markets that might otherwise end up in the lap of the Trump Treasury could be outsourced to the Fund. 

And the World Bank was simply too big and complex to understand, much less rein in, as Malpass learned to his chagrin.

This time could be different. 

Trump no longer cares about financial markets, or so it would appear. 

He mentions them less. 

Though stock indices have fallen sharply, especially in the last week, this has not deterred him from destroying significant government functions. 

A more radical approach to institutional deconstruction is clearly underway.

Having shut down USAID, it would be counterintuitive for Trump to countenance continued US participation in the World Bank, an even larger aid-giving organization. 

And withdrawing from the Bank while remaining in the IMF would be the kind of peculiar half-measure so far shunned by Trump 2.0. 

Like the Bank, the IMF features climate resilience in its programmatic lending

The IMF can point to the fact that it has a large loan outstanding to the Argentine government, led by Trump’s friend, Javier Milei. 

But Project 2025, which provides the roadmap for the second Trump term, makes no bones about the fact that the United States should withdraw from both Bretton Woods institutions. 

Trump has already signed an executive order instructing his Secretary of State and UN ambassador to conduct a review of all “international intergovernmental organizations” to determine from which the US should withdraw.

The Bank and the Fund can stumble on without US participation. 

Unlike in the case of USAID, the Trump administration can’t change the locks or disconnect employees’ email accounts. 

Elon Musk’s wet-behind-the-ears acolytes can’t get by either institution’s security guards.

The US cash contribution to the World Bank, moreover, is small – only $2.8 billion in 2024. 

The Bank funds itself mainly by issuing bonds backed by the full faith and credit of its members. 

As in the case of the war in Ukraine, European countries could step up. 

Their guarantees could make it possible for the Bank to continue borrowing in international capital markets.

US financial commitments to the IMF, through quotas and the New Arrangements to Borrow, are more substantial, on the order of one-fifth of the Fund’s resources. 

Again, other countries would have to step up. 

These countries could include China, because US withdrawal would presumably make possible the quota and voting reform in the IMF which China has long sought and the US has repeatedly blocked.

The main loser in each case would be the US itself. 

America would be seen as denying critical financial assistance to developing countries if it withdrew from the World Bank. 

In the case of the IMF, the US would lose a channel of constructive influence over other countries’ economic and financial policies. Less soft power all around.

For the Fed, the situation is, if anything, more dire. 

We already see the first signs of renewed inflation due to Trump’s tariffs and proposed tax cuts. 

At some point, Trump will no longer be able to blame former President Joe Biden’s administration for inflation, so he will blame the Fed. 

His chaotic policies have already begun undermining consumer confidence, creating recession risk. 

When that recession materializes, Trump will blame the Fed for not cutting interest rates faster.

Trump’s acting solicitor general has asserted the president’s power over “a variety of independent agencies.” 

Fed Chair Jay Powell can go to court if the president moves to remove him and his fellow board members summarily. 

But Trump shows no inclination of acceding to the courts. 

He can appoint a new Fed chair who takes marching orders from the White House. 

He can send in Musk’s minions, backed by US marshals, to take over the Fed’s computer systems. 

Two months ago, such scenarios would have seemed outlandish. 

Not anymore.

Financial markets would react negatively and violently. 

At that point, we would find out once and for all whether Trump cares about their opinion.

Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, is a former senior policy adviser at the International Monetary Fund. He is the author of many books, including In Defense of Public Debt (Oxford University Press, 2021).