President Trump has a new nickname for Jerome Powell: “Mr Too Late.” The American president accuses the Federal Reserve chair of being “behind the curve” in cutting interest rates, just as he and his colleagues were too slow to tighten during inflation’s resurgence. Last week, Trump toured the Fed’s building renovations, complaining loudly about cost overruns. The unsubtle message: We don’t like Powell’s monetary policy, so we’re hunting for other reasons to sack him.

This political pressure to lower interest rates alarms former Fed chairs Ben Bernanke and Janet Yellen. Writing in the New York Times, they state that “keeping politics out of monetary policy decisions leads to better economic outcomes”. They’re right that politicising monetary policy could be very destructive. But doesn’t their argument miss the wood for the trees? Long-term, the graver danger to central bank autonomy isn’t Trump’s tweeting, it’s US politicians’ borrowing.

Unless something drastically changes, unsustainable government debt trajectories risk unleashing “fiscal dominance”, whereby monetary policy becomes subservient to government funding needs. The current debt outlook for countries like the US and UK could usher in a world in which fiscal realities constrain monetary decisions, weakening central banks’ grip on inflation.

As David Beckworth, economist at George Mason University, puts it: “The consolidated government budget constraint must hold.” All government spending must ultimately be financed by tax revenue, debt issuance or money creation. If politicians keep running very large deficits, as the US seems intent on, and debt tests market limits, higher inflation is all that’s left to pick up the slack.

Unsustainable government debt eventually traps a central bank. Markets start demanding higher yields to compensate for default risk or higher inflation expectations, leaving central banks an unenviable choice. They can tighten policy to curb inflation expectations, driving up borrowing costs and risking acute fiscal crisis. Or they can abandon their inflation target, aiding the government as higher inflation erodes the real value of government debt.

To avoid spiralling interest rates in the latter scenario, governments have historically imposed financial repression too, mandating institutions to buy government bonds or capping interest rates to ensure negative real rates. In short, under fiscal dominance, monetary and financial policies get subordinated to support government’s financing needs, with more tolerance for high inflation.

Trump’s specific attacks on Powell illustrate this danger. The president isn’t simply complaining that Fed policy hurts the real economy. He’s moaning that tighter money is making government borrowing pricier. The worse the debt outlook, the greater the risk the Fed loses its ability — what Beckworth calls its “economic independence” — to control inflation.

Economists like me have long argued that inflation depends entirely on monetary policy, not deficits. Larger deficits don’t automatically produce higher inflation unless central banks accommodate them, we said. That’s true: under normal conditions, inflation wholly hinges on central banks’ monetary actions and credibility.

But fiscal dominance is far from normal. When unsustainable debt erodes the boundary between monetary and fiscal policy, inflation slips out of central banks’ control. During the pandemic, we got a preview of how effectively monetising government borrowing could fuel inflation. Unless America cuts future budget deficits, that episode will repeat.

How did we get here? Ironically, central banks’ political independence may have encouraged fiscal recklessness. With inflation control outsourced to central banks, politicians perhaps borrow more aggressively, especially during downturns when quantitative easing distorts bond market signals.

Bernanke and Yellen are right that Trump’s pressure is dangerous. Politicians can criticise monetary authorities if they think policy misfires on inflation or growth, but pressuring Powell to reduce government borrowing costs — as Trump does — crosses a dangerous line.

Yet Trump’s rhetoric wasn’t born of a vacuum. He’s worried about government debt interest costs because the debt is high. Ultimately, reckless government borrowing, not Trump’s commentary, poses the real threat to meaningful Fed independence.