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.

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 2022/23.

The Fed believes Trump tariffs are another policy crisis, and they are moving the U.S. into recession to prove it. This is a fair review of the current standoff between Federal Reserve Chairman Jerome Powell and 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 (FOMC) “Independent”? 

No. 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.

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.

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.

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. 

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 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. 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 U.S.

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. 

The concern of the FOMC is simply this: If the FOMC 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 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.

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