Kenneth Rogoff, Professor of Economics at Harvard University, issued a stark warning at Davos 2026 about the unprecedented strain on US institutional credibility, particularly regarding Federal Reserve independence under President Trump's administration. Speaking at the World Economic Forum, Rogoff described the mounting pressure on the central bank as "banana republic stuff," drawing parallels with emerging markets where political interference in monetary policy has historically resulted in economic instability.\n\n## Political Pressure on Federal Reserve Independence\n\nRogoff emphasized that both ends of the US political spectrum harbor discomfort with an independent central bank, albeit for different reasons. While progressives have sought to expand the Fed's mandate into areas like social justice, inequality, and climate goals, Trump seeks direct control over monetary policy for political purposes.\n\n"Fed independence has worked very well, but it's fragile," Rogoff stated, adding that the ongoing Department of Justice scrutiny of the Federal Reserve should not be viewed as an isolated incident. He characterized the investigation as part of a broader strategy to intimidate Fed governors and provoke resignations.\n\n| Key Concerns: | Details |\n| ---: | :--- |\n| Target: | Not just Jerome Powell, but all Fed governors |\n| Strategy: | Intimidation through DOJ investigations |\n| Objective: | Reshape voting dynamics within the central bank |\n| Comparison: | Similar to emerging market institutional weakness |\n\n## Inflation Risks and Economic Trade-offs\n\nDespite his strong criticism, Rogoff stopped short of predicting runaway inflation under Trump's policies. Instead, he described the risk as a "slow crawl" higher in prices—a cost Trump may be willing to accept in exchange for political advantage.\n\n"I don't think inflation is going to go through the roof," Rogoff explained. "But it's a big mistake. Trump understands the risk, but in his mind it's a reasonable one if it helps him win the midterms."\n\nThe economist argued that lower interest rates in the near term could provide a temporary economic boost, even while creating longer-term inflationary pressures. He suggested that Trump views potential inflation as an acceptable trade-off for maintaining political control and winning future elections.\n\n## Tariffs as Permanent Policy Tool\n\nRogoff predicted that tariffs would remain a central pillar of US economic policy, regardless of potential Supreme Court rulings on their legality. He framed Trump's tariff strategy as primarily a foreign policy maneuver rather than a purely economic policy.\n\n"There's no question tariffs are here to stay," Rogoff stated. Even a strong court ruling against Trump would not fundamentally change this outcome, he argued, because the president has alternative avenues to impose trade barriers.\n\n| Policy Aspect: | Analysis |\n| ---: | :--- |\n| Permanence: | Tariffs will remain regardless of court rulings |\n| Primary Purpose: | Foreign policy tool, not economic policy |\n| Legal Strategy: | Linking tariffs to national security concerns |\n| Supreme Court Argument: | Tariffs essential for presidential foreign policy authority |\n\nBy connecting tariffs to national security—particularly through his push to acquire Greenland—Trump is strengthening the argument that trade tools fall within presidential authority. Rogoff noted that this Greenland maneuver serves a dual purpose: territorial ambition and legal strategy directed at the Supreme Court.\n\n## European Reaction and Global Implications\n\nRogoff observed unprecedented European concern at Davos 2026, describing their reaction to Trump's Greenland ambitions as "hysterical." He noted that in 25 years of attending Davos, he had never witnessed such intense European upset, comparing it to reactions following Putin's invasion of Ukraine.\n\nThe economist's warning from Davos was clear: while economic data may appear stable, the deeper risk lies in the politicization of institutions that underpin global financial stability. As Trump continues to dominate the global agenda, the critical question for markets extends beyond his next announcements to how much institutional credibility the global economy can afford to lose.\n\nSource: https://www.cnbctv18.com/world/davos-2026-trump-tariffs-fed-credibility-warning-kenneth-rogoff-19823851.htm

Federal Reserve Vice Chair for Supervision Michelle Bowman has signaled the central bank's readiness to implement additional interest rate cuts if labor market conditions continue to weaken. Speaking at an economic forum in Massachusetts, Bowman emphasized that policymakers should remain flexible in their approach to monetary policy adjustments.

Labor Market Concerns Take Center Stage

Bowman highlighted growing concerns about the stability of the US employment landscape, describing the job market as increasingly fragile despite maintaining near full employment levels. She warned that the labor market appears vulnerable to further deterioration in the coming months, creating potential for rapid changes that require nimble policy responses.

The Fed official stressed that unless there is clear and sustained improvement in labor market conditions, policymakers should avoid signaling a firm pause on rate cuts. She emphasized the importance of maintaining flexibility rather than committing to a preset policy path.

Economic Outlook and Policy Stance

Despite labor market concerns, Bowman maintained a constructive baseline outlook for the broader economy. Her expectations include:

• Economic activity expanding at a solid pace
• Labor market stabilization near full employment as monetary policy becomes less restrictive
• Inflation pressures easing as trade tariff effects fade
• Underlying inflation remaining close to the Federal Reserve's 2% target

Bowman characterized the current policy stance as moderately restrictive and advocated for forward-looking interest rate decisions based on forecasts informed by comprehensive economic indicators and ongoing engagement with businesses and communities.

Recent Federal Reserve Actions

The Federal Reserve enters 2026 with expectations that inflation pressures will moderate while the labor market stabilizes and economic growth continues. However, recent policymaker comments suggest no immediate urgency to act, as inflation remains above the 2% target.

Additional Market and Regulatory Concerns

Bowman also addressed vulnerabilities in financial markets, warning that equity valuations appear stretched. She expressed concern that disappointing returns from artificial intelligence investments could trigger sharp corrections in stock prices.

Regarding bank supervision priorities, she outlined several key areas for focus including improving mergers and acquisitions review processes, evaluating capital requirements across the banking system, addressing payments and check fraud, and strengthening examiner training and development programs.

Political and Independence Challenges

The Federal Reserve continues facing pressure from President Donald Trump to implement further rate reductions, even as he prepares to name a successor to Chair Jerome Powell, whose term concludes in May. Tensions between the administration and the central bank have intensified following reports of criminal targeting over headquarters renovation costs, with Powell citing concerns about the Fed's independence in monetary policy decisions.