The National Interest
Jerome Powell’s Tough Choices at Jackson Hole
by Desmond Lachman
From a longer run point of view, what Mr. Powell chooses to say at Jackson Hole will not make a material difference to the US economy’s future trajectory. Even if he signals that he will be prepared to make a 25- or 50-basis-point interest rate cut, such a signal will not satisfy President Trump, who is calling for the Fed to cut interest rates by three full percentage points immediately. This means that for the remainder of his term, through May 2026, Mr. Powell will continue to face intense pressure from Trump to cut interest rates aggressively.
Far more important for the economy will be Trump’s efforts to bring the Federal Reserve under his control, with the explicit purpose of following a loose monetary policy. This could undermine investor confidence in the US commitment to keep inflation in check, especially at a time when the country has a gaping budget deficit and government spending remains unsustainable. In turn, this could make investors, in general, and foreign investors, in particular, reluctant to buy US government bonds at their current yields.
Before continuing with his push for low Fed interest rates, President Trump should recall that it is not the Fed’s interest rates that matter most for the economy, but rather the 10-year Treasury bond yield. That yield has a direct impact on mortgage rates, automobile loan rates, and the other key borrowing rates in the economy. If unduly low Fed rates fuel inflationary expectations and cause long rates to rise, the Fed will be harming rather than helping the economy.
Before persisting with his attacks on Mr. Powell, President Trump might want to consider the strong warning signals coming from the dollar, gold, and bond markets, which indicate that investors are starting to lose confidence in America’s ability to service its debt without resorting to inflation. Since the start of the year, the dollar has lost around 10 percent of its value despite higher import tariffs and a widening of the short-term interest rate differential in America’s favor. Meanwhile, gold prices have surged by around 25 percent, and US Treasury bonds seem to have lost their safe-haven status.
Unfortunately, Trump appears to believe firmly that the country needs cheap money, even when inflation remains uncontrolled and US public finances are in a precarious state. This will likely prompt him to announce a dovish replacement for Mr. Powell well before his term expires in May 2026 and to continue stacking the Fed board with people who share his easy-money persuasion. In doing so, he is likely taking the United States down the road to a dollar and bond market crisis before next year’s midterm election.
About the Author: Desmond Lachman
Desmond Lachman is a Senior Fellow at the American Enterprise Institute. He previously worked as a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging-market economic strategist at Salomon Smith Barney.
Image: Federal Reserve / Public Domain.
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