Former Treasury Secretary warns investors may be underestimating risks to Federal Reserve’s independence

Former Treasury Secretary Lawrence Summers warned that investors may be underestimating risks to the Federal Reserve’s independence, saying calm conditions could change fast. “We’re on the foothills of a credibility crisis” for the central bank, he said on Bloomberg Television’s Wall Street Week with David Westin, adding, “We are in completely unprecedented territory.”

Summers pointed to several recent moves and proposals from President Donald Trump. He cited Trump’s push for interest-rate cuts of about three percentage points, “which no economist anywhere has endorsed”, and the president’s “harsh rhetoric” aimed at Chair Jerome Powell.

He also noted the effort to remove Governor Lisa Cook “with no kind of due process,” and reported that Trump allies are exploring ways to reshape leadership at the Federal Reserve’s district banks.

“This is an attack on the governance of the institution,” said Summers, a Harvard University professor. He added the U.S. isn’t in a full-blown credibility crisis yet, because “people believe that, ultimately, US institutions endure and succeed.”

Summers faulted Republicans for not speaking up against what he called “the wholesale politicization of the Fed.”

He set today’s reaction against “a long tradition of distinguished Republican leaders who have stood up for the importance of inflation credibility” and the principle of Fed independence. “I particularly admired Senator Pat Toomey,” he said, referring to the retired former ranking Republican on the Senate Banking Committee.

Investors brace for long-term inflation as yield gap hits 70 basis points

Summers said the lack of response from the financial community is “really disturbing.”

He said finance leaders have focused more on criticizing Zohran Mamdani, the democratic socialist running for New York mayor. He said he suspects “the price of opposition” to the president is being driven higher by the range of tactics used against critics.

Summers said he worries that “highly irresponsible behaviors are being normalized by what the president is doing,” and by the failure of “the establishment” to resist and call out those actions. So far, he said, “There hasn’t yet been a dramatic market reaction” to the Fed-related maneuvers, though some signs of unease have appeared.

One signal he flagged. The yield premium of 30-year Treasuries over 10-year notes touched around 70 basis points this week, the widest since the inflation surge began in 2021. Longer-dated bonds are especially sensitive to where investors think inflation will settle over time. Those expectations could drift higher if markets come to believe the Fed will keep its policy rate artificially low at the expense of future price stability.

Summers warns “we are playing with fire” on inflation expectations

“We are playing with fire in terms of inflation expectations,” He said. “We haven’t seen substantial reactions in markets yet. But this could turn very quickly if the psychology changes.” He added that large U.S. budget deficits add further strain.

People familiar say Trump is exploring ways to gain more control over the Fed’s 12 regional banks, not just the Washington appointments. If courts uphold his move to remove Governor Lisa Cook, he could try to secure a majority on the seven-member Board, but rate decisions come from the FOMC, which also includes five regional bank presidents that the White House doesn’t pick.

Closer scrutiny of how those presidents are chosen and reappointed, by each bank’s private board and the Board of Governors, would be another unusual attempt to influence a process meant to be insulated from day-to-day politics.

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