Powell has done a fine job as chair of the Federal Reserve.
He is under attack, as Fed chairs often come under attack.
President Trump clearly wants an interest rate cut. POTUS sometimes talks as if such a cut is a nice reward for a well-performing dog. Our economy has "virtually no inflation" he has said, and "is doing really well," so the rate should be cut to 2 percent. Good dog. Here's the treat.
That is insane. The economy seems to be avoiding inflation because Powell has kept rates up. After all, one of the consequences of high rates is to make fixed income instruments, bonds and the like, attractive. Investment in boring long-term bonds is like investment of one's cash in a pillow case. It is money effectively taken out of circulation -- hence it is a damper on prices.
To be clear, Powell is not holding rates at historically high levels, unless one's historical lens is quite near sighted. Rates are roughly where they were through the Clinton dot-com-boom era, for example. But Powell also doesn't have rates at emergency-stimulus low levels, such the recent Covid-era zero.
Powell has rates at levels one might properly consider historically normal. He isn't cutting further because Trump has this tariff obsession. Back in February, after Trump's inauguration but weeks before the "liberation day" announcements, Wolters Kluwer surveyed 47 corporate economists (not the academic folks) and found that 43 of them (91 percent) expect that if tariffs are imposed that will significantly boost inflation this year, pushing it above the Fed’s 2% target.
The Trumpets have kept up a constant cloud of tariff deadlines made and deferred, deals offered and outlined, and there is of course ongoing constitutional litigation about whether they have the authority to do any of it without acts of Congress. Yet some increases are in place and others are on the way, and the uncertainty is part of the problem itself, not part of the solution.
An interest rate cut is not a treat for a good dog, it is a shot a central banker may dutifully fire if the politicos are risking recession, just as a rise is one the central banker may fire if they are risking inflation. And it makes perfect sense for Powell to keep some of his powder dry.
But the administration's more heartfelt argument for a rate cut is not the give-the-dog-a-treat one. It is, rather, the fact that the Treasury has to pay interest on its bonds, so lower rates means less money going out the door. On his TruthSocial site, the President has said the cut he wants would "save $BILLIONS on all of Biden's Short Term Debt."
It's all Biden's short term debt? Ummm, no. The US Treasury was $28 trillion in the red the day Joseph Biden took office and whatshisname, Biden's precursor, left town.
But the idea that servicing the debt, a problem made more serious by passage of the incumbent's "big beautiful bill," is the pitch here, is itself insane. Lower rates so we can service the debt we keep incurring!
You know what else might help us service the debt? Incurring less of it. Running smaller deficits.
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