Introduction to the Federal Reserve and President Trump’s Disagreement
The surface argument between the Federal Reserve and President Trump appears to revolve around whether we should cut the fed rate to reduce demand, free up supply, and thereby keep inflation in check. This debate has sparked a discussion about the role of the Federal Reserve in the economy and its relationship with the government.
The Federal Reserve’s Resistance to Rate Cuts
The Federal Reserve believes that Trump’s tariffs are a policy crisis, and they are moving the U.S. into recession to prove it. However, there are much larger forces at work, and much more is at stake in the Powell/Trump rate scuffle. The Federal Reserve is resisting the clear indicators that their crisis rates are leading the U.S. into recession and preventing the massive growth needed to fulfill Trump’s trade and America-First agenda.
Is the Federal Open Market Committee (FOMC) Independent?
The FOMC’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 Consumer Price Index (CPI) or Producer Price Index (PPI) inflation.
Reviewing the FOMC Tariff Monetary Policy
Let’s review the FOMC 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.
Can the FOMC’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 U.S. to provide energy, production capacity, and military support for countries around the world, the FOMC policy must be recalibrated to accommodate a 4-5% annual growth in the U.S. economy for the next several years. FOMC models appear to be calibrated to 1% to 1.5% growth.
What’s Really Going On Between Powell and Trump?
Underlying the Trump/Powell clash 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 textbook in print for economics.
Conclusion
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 U.S. into recession and preventing the massive growth needed to fulfill Trump’s trade and America-First agenda. The views expressed here are those of the author, and it is crucial to consider the potential implications of the Federal Reserve’s decisions on the economy and the country’s future.
