By GLEN BIEGEL
The surface argument between the Federal Reserve and the president appears to revolve around whether we should keep the current fed rate to reduce demand, free up supply, and thereby keep inflation in check.
Like a cancer treatment, we administer “rate poison” to the economy, the inflation cells consume the poisonous Fed rates, the economy gets a little sick, but the patient lives after the recession. Dramatic Federal Reserve rate rises are followed by recessions when they are a response to bad policies, like in the housing crisis of 2008 and the monetary crisis in 2022/3. The Fed believes tariffs are a policy crisis in 2025 and is moving the US into recession to prove it.
This is a fair review of the current standoff between Fed Chairman Jerome Powell and President Donald Trump, but there are much larger forces at work and much more at stake in the Powell/Trump rate scuffle.
Is the Federal Open Market Committee independent?
No. The Federal Open Market Committee’s independence cannot be maintained if it stands against policy. If you are for one policy and against another, then you are a de facto partisan actor in that policy fight. The Fed has labeled potential inflation resulting from tariffs as something that requires monetary policy to address, or, more accurately, undermine, and is therefore not independent of the tariff policy issue.
Can the Fed affect tariff inflation through monetary policy?
No. Businesses will adjust to higher costs or move supply chains to rebalance the cost of materials. Consumers will shift demand to account for the higher prices. Nothing in the Fed’s tools can affect that process. Since nothing can affect the higher costs of materials or goods from tariffs, the Fed has no business including tariff costs regardless of whether they do or don’t register in overall CPI or PPI inflation.
Let’s review the Federal Open Market Committee tariff monetary policy from two vantage points, one where tariff inflation is offset by other larger factors like energy or AI. In other words, tariffs always cause inflation but is it likely that other policy decisions can offset the costs of tariffs, also known as consumption taxes on foreign goods and materials. The other scenario is where tariffs register measurable, one-time (aka transitory) inflation in the economy.
In the first case, if tariffs are offset by other cost factors like energy, transportation or AI, then they will not register as topline inflation and they are not a policy that the Fed needs to try to offset with higher rates, especially rates high enough to force a recession.
If tariffs are a transitory, one-time cost of doing business that is likely to moderate as supply chains and efficiencies are found, then they are also not something the Fed should try to offset with higher rates, especially rates high enough to force a recession.
Can the Federal Open Market Committee’s models accommodate the growth agenda of Trump?
Maybe, but not currently. Since Trump’s trade negotiations require trillions in new investment, production and new projects in the US to provide energy, production capacity and military support for countries around the world, the FOMC policy must be recalibrated to accommodate a 4 to 5% annual growth in the US economy for the next several years. FOMC models appear to be calibrated to 1% to 1.5% growth.
Can the models be changed, and who would lead them to do that? The EPA regulatory changes alone can result in a .3% increase in GDP each year. How will building, energy and mining projects happen with borrowing rates sky high? The agreement to spend 5% of GDP by NATO countries would also yield an almost 2% increase in GDP for the US.
What’s really going on between Powell and Trump?
Underlying the Trump/Powell clash of titans is a deeper debate about Federal Reserve Rate orthodoxy. Specifically, are increases in the fed rate in and of themselves inflationary or deflationary. Orthodoxy says that the economy requires high rates to force a reduction in inflation. The economy will not self-correct with lowered rates.
The conundrum is this: If the Fed reduces rates now, while inflation is above 2%, and inflation decreases, it will call into question decades of scripture about the tightening and loosening of monetary policy by the Fed and may force a rewrite of every textbookin print for economics.
The concern is simply this: If the Federal Open Market Committee did lower rates and inflation came down, it would destroy the guiding principles of the Fed that they have doggedly followed for 50 years. At stake in the current fed decision is something much more essential than the argument between Powell and Trump, even more important than the independence of the Fed.
What is at stake if inflation falls as they lower the Fed rate is nothing less than orthodoxy, and that is why the Fed is resisting the clear indicators that their crisis rates are leading the US into recession and preventing the massive growth needed to fulfill Trump’s trade and America-First agenda.
Glen Biegel is a technology security professional, Catholic father of nine, husband to a saint, and politically active conservative.
Wouldn’t you rather pay back your debt with inflated money (if at all)?
Great article, Glen. But isn’t Fed Chair Jerome Powell acting more like the current rate struggle is political rather than economic? BTW, Powell is not an economist; he is a lawyer which may be part of the problem. The Fed’s failure to reduce interest rates is causing a huge downturn in housing sales across the nation. People seem to be sitting on the sidelines waiting for mortgage rates to go down. The rate for a conventional loan averages 8% across the nation. It seems as if Powell can control the success of President Trump’s domestic agenda.