Yves here. While discussions about the Federal Reserve’s interest rate movements abound across many platforms, we generally refrain from contributing unless there’s a significant insight to offer. Occasionally, we highlight notable evaluations—good or bad—within our Links. Historically, we’ve emphasized the views of experts who argue that increasing interest rates may be an ineffective and even counterproductive tactic for addressing supply and commodity shocks, notably referenced in Jamie Galbraith’s comprehensive analysis of Fed Chair Kevin Warsh’s decisions.
Dean Baker addresses a related matter: President Trump, frustrated by his inability to control the Fed chair, has taken a more aggressive stance.
By Dean Baker, Distinguished Senior Fellow at CEPR. Originally published at Beat the Press
I had planned to comment on the Fed’s recent decision to hike rates, but I don’t have much to add beyond what I discussed last week. While inflation remains high, the labor market appears relatively stable. However, I don’t believe that increasing rates is an effective method for countering inflation sparked by tariffs and Trump’s confrontations with Iran.
As mentioned, there is no indication of the wage-price spiral reminiscent of the 1970s. In fact, wage growth has decelerated significantly over the past two years. Wages were increasing at more than a 4.0 percent annual rate in 2023 and 2024, but that year-over-year figure has dropped to 3.1 percent. The annualized rate—which compares the average from the last three months (June-August) with the preceding three (March-May)—is currently just 2.7 percent. This reduction occurs alongside a rise in inflation from just over 2.0 percent to above 3.0 percent.
Given the minimal risk of accelerating inflation due to excessive demand, raising rates further seems unwarranted. One caveat I would note is that expectations surrounding a rate hike had become deeply ingrained, especially following Fed Chair Kevin Warsh’s comments during the annual Jackson Hole conference. It might be the case that long-term rates would increase more if the Fed were to hold their rates steady rather than opting for a hike. In light of this, I might have supported the hike.
The more significant news yesterday, though, was President Trump’s reaction. For quite some time, Trump has espoused a peculiar theory that our economy—which he claims is thriving (though it’s not)—should warrant the lowest interest rates. This is contradictory, as standard practice dictates reducing rates during economic downturns and increasing them in prosperous times.
Beyond Trump’s economic misinterpretation, the larger development was his immediate decision to list the Fed among his perceived adversaries, claiming the rate hike was part of a vast conspiracy aimed at tarnishing his image. This assertion is quite astonishing, considering Trump had appointed Kevin Warsh as Fed chair just this spring. It appears Trump believes that his choice has swiftly transitioned to the opposing side.
Moreover, the vote for the rate hike was unanimous, meaning all four individuals Trump appointed to the Fed—including his previous pick, Jerome Powell—aligned against his view.
This comes on the heels of Trump’s defeat at the Supreme Court regarding his proposal for the Postal Service to verify voter lists for mail-in ballots for the upcoming November elections. In that ruling, all three justices he appointed sided against him, upholding a stay from a lower court that blocked his initiative.
Trump expressed dissatisfaction, stating, “They are not the people I interviewed,” suggesting that the Court has submitted to so-called liberal pressures.
It’s not unusual for Trump to view anyone opposing him as part of a larger conspiracy. He has consistently accused judges on lower courts of conspiring against his agenda and labels reporters who publish critical pieces or pose challenging questions as “fake news.” Whenever polls reflect a decline in his popularity, he labels them as “fake polls.”
However, it takes it a step further when Trump claims that individuals he appointed—some even recently—have now become part of a grand anti-Trump coalition. If Trump weren’t the President of the United States, we could view this as an exaggerated comedy. Unfortunately, that is not our reality.
The repercussions of Trump’s proposed retaliation against the Fed’s rate increase are concerning. He suggested he might halt trade with selected countries with which we have a trade deficit. Trump seems to subscribe to the flawed notion that having a trade deficit signifies losing money with that country. This reasoning is as logical as claiming I lose money each time I pay for groceries.
As a reality TV star, Trump lacks even a basic grasp of economics. Implementing a trade halt with a key trading partner would significantly worsen the high prices that are already troubling citizens. Such a strategy appears detrimental economically and politically, though it may provide Trump a sense of toughness.
It remains uncertain whether Trump possesses the authority to arbitrarily enforce trade embargoes against nations. However, should the Supreme Court continue on its current trajectory concerning tariffs, it might allow Trump to implement such measures before ultimately ruling them unconstitutional after a year.
This scenario spells bad news for families grappling with rising costs and for countries needing to adjust their economies. Ultimately, it may serve to further underline that many still unconvinced of Trump’s erratic behavior should recognize just how disconnected he is from reality. Other nations will need to cultivate economic and defense relationships that do not involve the United States. At this point, we risk losing our credibility on the world stage.
