Powell Should Resist Pressure to Lower Interest Rates

By Fri, Aug 1, 2025

Today, interest rates in the U.S. are close to long-term averages. As a result, equity and fixed income investors are both rewarded. Lower rates aren't needed now, and may trigger a need for higher rates in the future.

Judging by his social media blasts, President Trump is likely to replace the current Fed chairman next May with someone who will lower interest rates. I don’t think that’s a good idea. A recent letter to the editor of the U.K.’s Financial Times confirmed my bias:

“In dis­cuss­ing Don­ald Trump’s desire for a Fed­eral Reserve that will deliver low interest rates to help reduce the gov­ern­ment’s bor­row­ing costs, Claire Jones (FT Big Read. Mon­et­ary Policy, July 10) fails to make a cru­cial point. The US gov­ern­ment does not bor­row at the Fed funds rate but rather at the longer-end of the US Treas­ury bond mar­ket.

“Any attempt to under­mine the Fed’s inde­pend­ence risks increas­ing infla­tion­ary expect­a­tions and exacer­bat­ing the dol­lar’s 10% decline that has occurred since the start of the year. In turn, that risks trig­ger­ing a Treas­ury bond mar­ket sell-off that would increase rather than reduce the gov­ern­ment’s interest pay­ment bill.

“Before going down the path of under­min­ing the Fed’s inde­pend­ence, Trump would be well advised to take a close look at Turk­ish Pres­id­ent Recep Tayyip Erdoğan’s recent sorry exper­i­ence with for­cing the Bank of Tur­key to cut interest rates. That exper­i­ment con­trib­uted to a Turk­ish cur­rency crisis, sharply higher infla­tion and increased gov­ern­ment bor­row­ing costs.”Des­mond Lach­man of the Amer­ican Enter­prise Insti­tute, a conservative Washington “think tank,” signed the letter.

Lower rates subsidized a bull market in stocks and real estate for a decade after the Great Financial Crisis but weakened the life/annuity companies to the point where they either stopped selling retail annuities, abandoned the U.S. market, or accepted domination by big Wall Street firms. Since 2022, annuities (and their purchasers) have gotten a welcome break. And aging Americans need decent yields on safe assets.

Then there’s inflation. The Trump tariffs and the “Big Beautiful Bill” could raise prices and increase the money supply, respectively. With new tariffs, consumers will pay more for imported goods (if they still buy them) or for domestic goods (if they switch to them). The BBB, by adding $4 trillion to the U.S. debt over 10 years, adds $4 trillion to the money available to the private sector (not counting the multiplication of dollars when the banks lever their Treasury bonds into new credit-money). Tariffs and the BBB, which evidently make sense to only one person, are likely to be inflationary.

Someone in his mid-30s recently complained to me that interest rates are “at their highest in decades.” He doesn’t remember the 12% (FHA) mortgage rates of the 1980s, or the imbalanced “TINA” (There Is No Alternative) lower-for-longer era in stocks. I and my contemporaries do. (And the Fed was unreasonably immoderate both times, imo.) Today, interest rates in the U.S. are close to long-term averages. As a result, equity and fixed income investors are both rewarded. Lower rates aren’t needed now, and may trigger a need for higher rates in the future.

© 2025 RIJ Publishing LLC. All rights reserved.