What Happens When a Central Bank Loses Its Credibility?

[fusion_builder_container type="flex" hundred_percent="no" equal_height_columns="no" hide_on_mobile="small-visibility,medium-visibility,large-visibility" background_position="center center" background_repeat="no-repeat" fade="no" background_parallax="none" parallax_speed="0.3" video_aspect_ratio="16:9" video_loop="yes" video_mute="yes" border_style="solid"][fusion_builder_row][fusion_builder_column type="1_1" layout="1_1" background_position="left top" border_style="solid" border_position="all" spacing="yes" background_repeat="no-repeat" margin_top="0px" margin_bottom="0px" animation_speed="0.3" animation_direction="left" hide_on_mobile="small-visibility,medium-visibility,large-visibility" center_content="no" last="true" hover_type="none" min_height="" link="" background_blend_mode="overlay" first="true"][fusion_text columns="" column_min_width="" column_spacing="" rule_style="" rule_size="" rule_color="" hue="" saturation="" lightness="" alpha="" user_select="" awb-switch-editor-focus="" content_alignment_medium="" content_alignment_small="" content_alignment="" hide_on_mobile="small-visibility,medium-visibility,large-visibility" sticky_display="normal,sticky" class="" id="" width_medium="" width_small="" width="" min_width_medium="" min_width_small="" min_width="" max_width_medium="" max_width_small="" max_width="" margin_top="" margin_right="" margin_bottom="" margin_left="" fusion_font_family_text_font="" fusion_font_variant_text_font="" font_size="" line_height="" letter_spacing="" text_transform="" text_color="" animation_type="" animation_direction="left" animation_color="" animation_speed="0.3" animation_delay="0" animation_offset="" logics=""]Central bank credibility was the focus of my PhD research. Since completing and publishing my thesis, I have frequently applied credibility theory in my professional work. Let me be clear from the start: this is NOT an academic post, but a professional perspective. My motivation for writing it is simple and very recent.While scrolling through the news this morning, I came across a warning from US Treasury Secr. Bessent about a potential recession if the Fed refuses to lower rates. This statement was made during an interview on CNN.Last week, Bessent also publicly listed the five most probable candidates for the Fed Chair position. What do they have in common? Two are members of the Fed’s Board of Governors nominated by Trump, one is the director of the National Economic Council appointed by Trump, one is a former member of the Board of Governors nominated by G.W. Bush, and the last one is BlackRock’s managing director and CIO, who, according to opensecrets.org, donated $33,400 to the Republican Party in 2016.Of course, a Democrat President appoints a Democrat to the Fed chair, and a Republican President appoints a Republican. This is neither a secret nor a new practice. However, here is the issue: Donald Trump is pressing for interest rate cuts, and now Bessent echoes that sentiment, warning of a recession and publishing a shortlist for the next Fed Chair at the same time. Furthermore, Trump claims he will name the next Chair before the end of the year, even though current Fed Chairman Jerome Powell’s term doesn't end until May.Just grasp the moment: the future chairman, who likely wants lower rates, has to wait (and certainly not in silence) until May, observing the current Chairman’s actions and potentially accusing him of ruining the economy with his policies. Since the next Chairman will be appointed by a Republican President and is currently outside the Fed, we cannot assume that their public statements will be unbiased, apolitical, or independent.At the same time, the American economy is facing increased inflation, which shows potential for an upward trend. Lowering interest rates would stimulate economic growth, but at the cost of rising inflation. As of September, inflation is at 3%, well above the Fed’s 2% target.The scenario described, with a nominated Chairman pressing for lower rates and a current Chairman holding firm, creates the public expectation that rates will decrease after May. The public is not stupid, they know that lower interest rates typically lead to higher inflation. This means large market players may start stockpiling early, raising demand and creating a self-fulfilling prophecy of rising inflation before interest rates even fall.I'm under no illusion that this blog post will influence major corporations. However, I want to warn professionals, small and medium business owners, and individuals to prepare for a period of high inflation. Current monetary policy, government pressure, and economic indicators all point in this direction. Regarding government pressure, I recently discussed the dynamics of debt and inflation with Asharq Business with Bloomberg. You can watch my analysis/interview with English or Greek subtitles below:[English Version][Greek Version]In conclusion, I feel a sense of foreboding for my fellow Americans given how things seem to be unfolding. Unfortunately, due to the close economic ties between the USA and the EU, I believe a recession in both regions is almost inevitable. The problem is compounded by the fact that the ECB already has very low interest rates (currently 2%), leaving it with almost no room to maneuver.[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]