It was only two weeks ago in this space that I commented on the Federal Reserve’s symposium in Jackson Hole and what it might mean for interest rates and the U.S. economy. So, you might be surprised that I am addressing the Fed again so soon, especially since I am not an economist, finance expert, or banker. However, since there is so much happening with the Fed that will likely impact us as business people, consumers, and investors, I thought it might be helpful to summarize what is going on now, what will be going on in the near future, and how all of those events will impact our finances both as businesses and individuals in the future.
Who are the key players and why are they important?
There are currently at least three major personnel issues going on with the Fed. At a minimum, President Trump is using these issues to make the Fed more sympathetic to his desire to lower interest rates. As a worst-case scenario, he is attempting to significantly reduce the independence of the Fed, which would be bad news for all of us (more on that below).
The first personnel issue was prompted by the August 1st resignation of former Fed governor Adriana Kugler, with just months left in her term that was set to expire in January. To serve out the remainder of her term, President Trump has nominated Stephen Miran, the current Chairman of the President’s Council of Economic Advisers. While Miran intends on taking a leave of absence from his current post (rather than resign) if he is confirmed, his independence from the President is clearly in question.
The second personnel issue is the attempt by President Trump to fire current Fed governor Lisa Cook, who was a nominee to the Fed by President Biden (as was Ms. Kugler). The potential firing is being driven by Bill Pulte, President Trump’s appointee as director of the Federal Housing Finance Agency (FHFA), who claims Ms. Cook improperly claimed multiple properties as her primary residence. (Note: There is speculation that Ms. Kugler resigned due to similar concerns.) While, if true, Ms. Cook has clearly committed a crime, it appears that the accusation is motivated by President Trump wanting someone more sympathetic to lower rates on the Fed’s Board of Governors.
The third and final personnel issue is that Fed Chairman Jerome Powell’s term as Chairman is scheduled to expire in May 2026. However, President Trump, with assistance from his Treasury Secretary, Scott Bessent, is actively interviewing candidates for Powell’s replacement. President Trump and Secretary Bassett recently indicated that the number of candidates has been reduced from 11 to 3, with those three being current Fed governor, Christopher Waller, former Fed governor, Kevin Warsh, and President Trump’s current Director of the National Economic Council, Kevin Hassett. An early announcement of a successor will likely undermine Powell, while the naming of Hassett would certainly further put in question the Fed’s independence. Although during his appearance on this past Sunday’s episode of CBS’s Face the Nation, Hassett indicated he was an advocate of Fed independence.
However, each of these personnel issues points to President Trump “putting his thumb on the scale” of Fed action. He needs to tread very carefully, as a country’s monetary policy is much more effective when it is determined independently by its central bank, such as the Federal Reserve is for the United States. Empirical evidence strongly links central bank independence to lower and more stable inflation and positive effects on a country’s financial stability by decreasing systemic bank risk. When politics is allowed to impact monetary policy, interest rates are often lowered for political rather than economic purposes, typically causing higher inflation. I am hopeful that President Trump and Secretary Bessent will choose Waller or Warsh as a more independent Fed leader than Hassett would be.
Status of “the Game”
As I indicated in my column two weeks ago, the Fed has a dual mandate of price stability and full employment. Inflation has remained “sticky” at an annual rate close to 3%, clearly higher than the 2% the Fed targets for stable prices. As employment has remained steady, the Fed has been reluctant to lower interest rates. However, as employment has shown signs of weakening recently, the Fed is more open to reducing rates to drive growth that will hopefully shore up employment.
Some key data on inflation are due today and tomorrow. The Producer Price Index (PPI) will come out today, and the Consumer Price Index (CPI) tomorrow. If these indices show inflation in control, it is highly likely the Fed will lower rates. The Fed’s Federal Open Market Committee (FOMC), which sets rates, meets in September, October, and December. We are expecting the FOMC to lower rates by 25 basis points (one-quarter percent) in its September meeting, and if inflation remains in control and employment remains soft, further cuts can be expected in October and December.
Impact on You
As the Fed lowers rates, the initial impact will be positive for businesses, consumers, and investors. Interest rates on loans, credit cards, and other debt should go down, stimulating business capital investment and providing more available funds for consumers. We would also expect equity markets to thrive as investors would expect companies to do better if rates are lower, and money currently earning 4% risk-free will no longer have the option and will have to be invested in equities for reasonable returns.
So, you may be asking, where is the downside of lower rates? The bigger problem occurs if inflation is not under control. If rates are lowered in such a scenario, inflation will become a bigger problem, and we will run the risk of the more serious problem of “stagflation,” in which economic growth stagnates while inflation rages. Therefore, it is important for the Fed to continue to be judicious.
My sense is that the currently independent Fed is doing its job well. I am particularly impressed by Atlanta Fed President Raphael Bostic, whose data-driven and pragmatic approach will serve our economy well in the long term. My hope is that we maintain an independent Fed with monetary policy driven by economic, not political, reasons.
