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EARLIER THIS WEEK, the Federal Reserve’s Open Market Committee met and decided to lower interest rates by a quarter-point. This immediately sparked a war of words.
At a press conference, Fed chair Jerome Powell took a swipe at the White House, blaming the president’s new tariff policies for an uptick in inflation.
President Trump wasted no time in responding. All year, he has been lobbying Fed officials to move rates lower. And while they have been taking steps in that direction, the pace has been incremental, frustrating the president. Powell is “a stiff,” Trump said on Wednesday. “Our rate should be much lower.”
This is just the latest chapter in a long-running feud. Trump first appointed Powell to the Fed during his first term but grew frustrated with him after a short time. As far back as 2019, Trump was chiding Powell online, calling him a “bonehead” at one point.
In 2022, the Biden administration reappointed Powell for a second term, with the result that the Trump-Powell feud continues today.
Why would the White House prefer to see rates lowered? In short, lower rates make life more affordable for everyone. They make mortgages cheaper, along with car loans and credit cards. Lower rates also make it less expensive for businesses to borrow. Thus, from a political perspective, lower rates are almost always popular.
The challenge for the president, though, is that he has only indirect control over the Federal Reserve. The Fed is technically an independent entity and not part of the executive branch, though the president does have the authority to appoint members to the Federal Open Market Committee (FOMC), which makes rate-setting decisions. The president also appoints the chair of that committee.
But as with all appointees, there’s never a guarantee which way committee members will go once they’ve been appointed. And their terms are staggered, meaning the president can’t easily make changes. Earlier this year, in fact, the president explored the idea of firing Powell but found that his hands were tied. That helps explain the ongoing war of words.
In addition to making purchases cheaper for consumers, lower interest rates are also positive for the stock market. Why? According to finance theory, the value of a company should equal the sum of all of its future profits. But future profits have to be adjusted for the time value of money—the idea that a dollar next year is worth less than a dollar today. When interest rates are lower, future profits are discounted less. All things being equal, that translates to higher stock prices. That’s another reason the White House would like to see the Fed take quicker action.
If lower rates carry so many benefits, why isn’t the Fed moving more quickly? That brings us to what’s known as the “dual mandate.” In its role setting rates, the Fed is responsible, on the one hand, for maintaining full employment. Lower rates help in that regard.
At the same time, the other side of the Fed’s dual mandate requires it to manage inflation. Economists talk about the risk of the economy “overheating,” and that’s Powell’s key concern. Especially after seeing prices spike nearly 10% in the wake of the pandemic, the Fed wants to avoid a repeat of that unpleasant experience. Higher rates help keep inflation in check.
The Fed’s job, in other words, is to strike a delicate balance between rates that are too high and too low. This ends up being a tricky task, and for that reason, presidents have often tangled with their counterparts at the Fed.
In the 1830s, prior to the creation of the Federal Reserve, there was an entity known as the Second Bank of the United States. It was the closest thing to a central bank at the time. But President Andrew Jackson had bitter conflict with the leaders of the Second Bank. He ultimately revoked its charter and had it shut down. That’s why the United States lacked a central bank for decades, until the Fed was created. But almost as soon as the Fed was created in 1913, conflict with successive White Houses resumed.
In the 1950s, the Fed, under chair William McChesney Martin, was moving more slowly than President Truman had wanted, leading him to brand Fed officials “a bunch of cowards.”
Martin stood his ground though. In a speech that same year, he explained that the Fed’s role was akin to that of a chaperone who is obligated to “take away the punch bowl” before things got out of hand. Martin, in fact, is credited with coining that term.
From Truman’s point of view, though, lower rates would have served a larger national purpose. In the wake of World War II, the government was saddled with a historically high level of debt. Truman’s hope was that if the Fed lowered borrowing costs, it would help the government work down its debt load more quickly. It was for that reason that Truman also excoriated Martin as a “traitor.”
This tension very much mirrors the situation today. Since Covid, the federal government has been running dramatically higher deficits. This year, the federal government will bring in about $5 trillion but spend $7 trillion. Each year that deficits like this persist cause the government’s total debt load to grow. That, in turn, causes interest expenses to consume more and more of the budget. This year, interest will top $1 trillion, equal to one-seventh of all spending. Just as in Truman’s day, this is another reason today’s White House would like to see rates lower.
Lyndon Johnson also butted heads with Fed chair Martin, at one point summoning him to his Texas ranch to press his case. Martin had wanted to keep rates higher because he feared that spending for Johnson’s Great Society would be inflationary. A frustrated Johnson reportedly shoved Martin against a wall and bellowed at him. Johnson also asked his attorney general if he could fire Martin but was advised that he couldn’t legitimately remove him.
The debate about the Fed goes beyond the question of higher rates vs. lower rates. More fundamentally, the debate today is about the Fed’s overall role. In recent decades, the Fed has taken on the role of serving as lender of last resort during crises. In 2008, it helped stabilize banks by giving them cash in exchange for wobbly assets on their balance sheets.
During Covid, the Fed dramatically expanded on its 2008 playbook. You may recall, for example, the stimulus checks and other payments the government issued. Those programs cost trillions. They were financed by the Federal Reserve, which has the unique ability to create dollars essentially out of thin air. The Fed has also stepped in to help various other crises over the years.
In light of this history, most people today see the Fed’s expanded role as a good thing. But not everyone agrees. Treasury secretary Scott Bessent recently published an opinion piece in which he criticized the Fed for taking its lender-of-last-resort playbook too far, flooding the economy with too much easy money for too many years. In Bessent’s view, this has contributed to widening wealth inequality. “The Fed must change course,” he wrote in September, and he is working to do what he can from the outside.
Where does all this leave individual investors? Recently, I outlined ways an individual investor could build a portfolio of bonds to manage market risk. As this debate over the Fed reminds us, another reason to diversify is to protect against potential public policy changes that could affect the bond market.
As investor and author Howard Marks often says, “we can’t predict, but we can prepare.”
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Fiscal policy matters as much (if not more) than monetary policy. As a generation, Americans have lost the ability to determine what is fair and what we want as a country. Monetary policy by the Federal Reserve cannot fix this!
If higher rates help keep inflation in check why didn’t higher rates do the job in the period 1969-1981–CPI was 6.20%– in ’69–12.34% in 1974—-13.29% in ’79–12.52% for 1980, and we see 8.92% in 1981.
Remember interest rates on money market funds back in those inflation days, but of course after taxes and inflation you were still negative. I think some funds were paying between 10% and 12%.
Remember mortgage rates back in the day?
Where’s the correlation between high interest rates and controlling inflation? Heck we had almost no inflation during the “great recession”, and folks were worried about deflation with super low rates. We all ran to refinance not that many years ago.
Inflation is too much money chasing too few goods–high prices are a symptom just like a high fever is a symptom of a sickness.
If you jack up the money supply (M2?) maybe we get inflation.
Remember the 7 most important words of a retiree; every year everything I buy costs more. If you think bonds are an answer you might be in trouble. I think history shows dividends in cash crush bond cash dividends. You pay a price with brown underwear years and volatility, but equities for income are tough to beat.
Bonds might be a good cushion in bad markets (2022?), but to stay ahead of inflation I’d like to see some 20-30-year (living in retirement) evidence.
AFAIK, the reason that higher rates help keep inflation in check is because companies facing higher borrowing costs start firing their workers.
With less people employed, their is less demand for stuff, & prices decline.
That always struck me as an extremely brutal way to fight inflation. Low paid workers pay a terrible cost for something they did little to cause.
I would think there is better policies than just
blindly raising rates. For instance a tax surcharge on $1M + incomes, a bigger one on $10M + incomes, etc..
Since rich people love tax cuts more than life itself, rich CEOs will hesitate to have their companies raise prices.
We want to eat our cake and have it too! And our representatives in Congress are more than happy to oblige us!
The funny thing about inflation is the fact that most economists predictions have been wrong for decades and we should disregard them, including the ones who got a Nobel prize, and especially the ones with political views.
In Nov 2016 Paul Krugman predictions were ridiculous
https://www.politico.com/story/2016/11/krugman-trump-global-recession-2016-231055
Earlier this year hundreds of economists and articles were published that tariff will bring high inflation, 10-11 months later the inflation is still under 3%.
Never in my life I based my investment or anything else on economists.
I have a friend, a prof of economics and accounting. He admitted that economists predictions are worse than meteorologists.
Powell and the Fed lost their dignity when we had the highest inflation in 4 decades while they claimed it’s transitory.
But, inflation was transitory!
Yet they were correct. Pandemic-related inflation, a worldwide phenomenon, did turn out to be transitory. Under post-pandemic Powell/Fed policy, the US had the second-fastest inflation recovery of any G7 nation (only France, a smaller and less complex economy, was quicker), with US inflation dropping back below 3% by the end of 2024.
I started reading the U.S. Constitution as a teenager and I remain a life-long student of the document. Most know that there are, in fact, only three branches of the federal government: Article I – legislative; Article II – executive; and Article III – judicial.
The Federal Reserve is certainly not in the legislative or judicial branches, which leaves only two alternatives.
Since the executive powers are vested in the president (see Article II), if the president cannot fire someone they are not in the executive branch. Therefore, either the president can fire the Fed members or the Fed is unconstitutional.
This is true whether anyone likes it or not, myself included.
Perhaps you are not familiar with Article 1, Section 8, Clause 5 in which it is very clear that the power to coin money and regulate the value thereof is vested in Congress. Congress created the Federal Reserve to execute these powers for them. So, is the Fed legislative? I’m sure that the USSC will be addressing this question very soon!
Great article as usual. However, I am not sure that lowering interest rates makes life more affordable for everyone. Maybe for those that have the funds to refinance a loan or make a down payment on a house, etc., but for those living paycheck to paycheck (unfortunately, more and more each day), the groceries, the rent, the cost of everyday needs, the needle does not move, or doesn’t more fast enough. I’m always amused by the market jumping when the Fed lowers its rate, followed the next day typically by an equally significant downturn…as just happened.
Adam, excellent article, please keep them coming. I feel the Fed Chair has one of the most difficult jobs in our Government. Fed Chair Powell, seems to me to be very good at what he does, and I prefer the next Chair be a lot like him.
Totally agree politicians are short term thinkers, like when is our DEBT going to blow up the economy! How long can we kick that can down the road.
Adam, as usual, you did a fine job explaining an important and complex topic which affects us all. When I read about this subject in the media, the story is mostly focussed on the drama and deluge of personal insults coming from the Whitehouse.
As a long term buy and hold investor, I appreciate the leadership of businesses, of any size, which prioritizes long term success of the company over it’s short term performance. Why would it be any different for our nation?
I completely agree with Adam’s insights. Another way of looking at the interest rate debates is to focus on short term and long term effects. In the short term, lowered rates leave more money in people’s pockets (credit card interest, variable mortgages, etc.) and spur economic activity (home buying, capital investment). Higher rates have the opposite impact.
But longer term, lower rates put more money into circulation, which increases inflation across a spectrum of goods and services. Higher rates, by contrast, shut down business expansion and can lead to lower employment.
The point: politicians on both sides of the aisle typically focus on the short term impacts of rate changes. That helps with popularity and elections. The Fed is insulated from that, and can take the longer view. Hence our current (and historic) conflicts.
Why haven’t we seen thoughtful articles like this in the real press? Lower rates don’t necessarily lead to affordabilty. There are a lot of competing variables.You discuss them well.
One thing you left out is perceptions. The manner in which the president attacks the Fed and individuals there undermines it. Seriously undermines it. And makes it far more difficult to discuss money policy and reality in a reasoned manner.
Thank you for this thoughtful article which tries to encompass a very complicated discussion.
To answer your first question, I don’t think the “real press” is the real press.
Scott Bessent’s view that the Fed should scale back on its practice of bailing out large distressed entities seems to fly in the face of President Trump’s desire to use the Fed to juice up the economy. If Trump nominates Bessent to succeed Jerome Powell and Bessent follows through on curtailing the scope of the Fed’s authority, President Trump may have a serious case of “buyer’s” remorse, it seems to me…