Trump vs. Powell: Who Wins?

President Donald Trump has made a lot of noise through the first five months of his second term, as expected. One particular piece of noise that has gone relatively overlooked is his criticisms of Federal Reserve chairman Jerome Powell.

What’s the beef? Trump wants Powell to lower interest rates to help spark the economy. Powell has been waiting for inflation to drop to 2 percent for an extended period of time before turning to rate cuts.

Inflation has come down significantly since its high of 9.1 percent in 2022. It has steadily dropped over the past three years from 3 percent to as low as 2.3 percent this year.

The Fed uses its fixed funds rate to battle inflation, making money more costly to get and therefore, more valuable. It has used this measure to bring inflation down post-Covid, and continues to keep the rate at a higher level until inflation reaches that 2 percent goal.

It’s important to understand why the Fed funds rate matters. Banks keep a reserve of cash to cover withdrawals — and how much a bank must keep is set by the Federal Open Market Committee (FOMC), which is apart of the Federal Reserve.

When banks have an excess of this cash, they may lend it to other financial institutions that are below the requirement or need the cash for other purposes.

If the financial institution plans to re-lend that cash, they have to set the rate higher than they borrowed at to make money. So, when the Fed funds rate is higher, it makes it more expensive for everyone to borrow money.

That means credit cards interest rates, mortgage rates, car loans, etc. all become more expensive. When capital is restricted like this, it makes it less likely for people to borrow, slowing GDP and limiting the flow of money in general.

It’s a tricky balance, one the Fed has the honor of handling. The Fed faces pressure from everyone under the sun, including the most powerful person in our country, to lower interest rates, no matter what.

Trump has his reasons for wanting to lower rates — and Powell, along with the rest of the Fed, has reasons for keeping rates where they’re at.

The Fed funds rate is essentially a temperature scale for the economy. The rate fell to the basement during the pandemic to help stimulate the economy as businesses shut down. This helped lead to the wild inflation mentioned earlier, forcing the Fed to send rates to the moon at 5.3 percent, holding it there for over a year.

The rate has trickled down just 100 basis points (one percent) over the past 18 months despite falling inflation over that period of time.

Powell and the Fed’s goal remains the same: 2 percent inflation, a mark we have yet to see. Until that marker is met, it’s hard to imagine much movement in the funds rate.

From Trump’s point of view, the economy is in great shape and the higher interest rates are costing the country money in debt repayments. It’s a fair reason to want to see lower rates, and perhaps Trump and Powell can find some middle ground.

Either way, it’s almost impossible for both to achieve their goals. So, who comes out on top?