The Federal Reserve has given up on taming inflation, just as Trump demanded — and he’s paying for it politically.
Politico reported this morning that President Trump is once again fantasizing about firing the chairman of the Federal Reserve, Jerome Powell, over the central bank’s reluctance to slash interest rates. “Frankly, I would love to get the guy currently in there out right now, but people are holding me back,” Trump lamented to reporters on Tuesday. He repeated the sentiment during an event yesterday: “I’ll be honest, I’d love to fire his ass.”
Directionally, however, Trump is getting his way on monetary policy. The Federal Reserve Board of Governors, which Powell chairs, has already cut interest rates twice this year, from 4.5 percent in September to 4 percent today. But the president wants rates to be cut by much more, much more quickly. By expanding credit, Trump believes that lower borrowing costs will stimulate job creation and economic growth, lower barriers to homeownership, and boost the stock market, which he views as a barometer of his success.
These are understandable aims in themselves, even if distorting the price of money is the wrong way to pursue them. And Trump is correct that easy monetary policy tends to juice economic indicators such as stock prices in the short run — which is all he really cares about — even though bubbles eventually burst. But even in the short run, Trump’s relentless push to cut interest rates to the bone is politically suicidal. In fact, the current Fed policy of keeping interest rates moderately low is already destroying his reputation on the economy and costing him in the polls.
As we have learned from this month’s off-year elections and from pretty much every public survey of Americans’ top concerns, the economy is the most potent political issue by a mile. Yet Americans’ economic discontent is not primarily because of jobs; the unemployment rate remains historically low, at 4.4 percent, and the number of jobs continues to grow (albeit at a slowed pace). It is not because the stock market is doing poorly; the S&P 500 is up over 12 percent year-to-date. It’s not even due to falling incomes; real wages have risen in the past year, and the median household income is higher than ever.
What, then, is making Americans so upset with the economy and, by extension, their political leadership? The answer is obvious to anyone paying attention: People are furious that the cost of living has continued to rise. Prices have not come down since Trump was inaugurated, as he foolishly promised they would on the campaign trail. Instead, they have continued to go up — not nearly as briskly as they rose during the Biden years, but up nonetheless. Voters have noticed, and they have placed the blame squarely on the incumbent president.
Can you blame them? Trump has repeatedly claimed full ownership of this economy, calling it the “best economy we’ve ever had.” He has successfully implemented his signature economic policy, a comprehensive system of tariffs on virtually all imports to the United States. This effort has proven especially misguided, as the function and, indeed, the purpose of tariffs is to raise import prices that are ultimately borne by consumers so they will buy more expensive domestic goods.
Yet while tariffs can raise the prices of certain products, they cannot produce the generalized increase in the overall price level that Americans have suffered since 2021. That sort of inflation, as the great economist Milton Friedman recognized, is “always and everywhere a monetary phenomenon” — the result of too much money chasing too few goods. We are still dealing with the consequences of the Covid-era explosion in the money supply, which was deliberately created as a form of economic stimulus through zero percent interest rates and unprecedented quantitative easing.
The only way to bring down inflation, as the Federal Reserve knew in 2022 and 2023, was to raise interest rates, thereby limiting the extension of credit that creates new money. But the Fed gave up the inflation fight too early. Despite its stated inflation target of 2 percent, the central bank began cutting interest rates in 2024, when inflation was just under 3 percent. Almost a year later, 3 percent is where annualized inflation remains — 50 percent above the Fed’s purported target. Yet policymakers have continued to cut rates and will likely do so again in the coming months.
That Trump is furious at Jerome Powell for not cutting interest rates further is, frankly, incredible. It has largely been the Fed’s unwillingness to raise interest rates sufficiently to quash inflation that has caused Trump’s economic approval ratings to collapse. And, if the president had his way, slashing rates to 1 percent or less, the money supply would grow even larger. Prices would rise higher and faster in turn, making persistent inflation the economic hallmark of Trump’s second term. The president should ask his predecessor how that turns out. He’d be finished.
If Trump understood the relationship between interest rates and inflation whatsoever, he would be calling on the Federal Reserve to recommit to price stability by tightening monetary policy, as Ronald Reagan did in the early years of his presidency. That means higher interest rates — high enough to bring inflation back under 2 percent for the first time in five years.
Instead, the president will continue to berate the Fed for not cutting rates quickly enough, raising the political pressure until it relents. If that doesn’t work, he will replace the chairman, when Powell’s term ends next year, with a lackey to slash rates for him. And, as a consequence, Trump and the Republican Party will keep paying the political price as inflation eats away at Americans’ incomes and savings.