Trump is wrong to pick a fight with Powell – but is right about interest rates

Telegraph

2 days ago

Visiting Scotland last week, Donald Trump used a joint press conference to mock Keir Starmer. He castigated Labour's policies on immigration, energy and much else. The Prime Minister sat awkwardly, sporting his trademark rictus grin.
Trump has lately dished out plenty of public humiliation – not least aimed at Jerome Powell, chairman of the Federal Reserve. The president has put huge pressure on the Fed to lower interest rates, to boost US growth and ease interest payments on America's massive $36trn (£27.6trn) national debt.
This jars badly with the conventional wisdom that central banks should be independent, allowing technocrat economists to set interest rates to bear down on inflation. That's far better for the economy in the long-run, but this precious independence is jeopardised when vote-hungry politicians seek to keep borrowing costs too low.
Such independence has become an almost sacred policy concept over the last half century. And no central bank matters more than the Fed, which sets the course for monetary policy across the globe.
Yet Trump, astonishingly, has lately called Powell a 'numbskull', a 'stubborn mule' and worse. On a recent Fed visit, he rebuked him over the cost of a refurbishment project – a potential pretext to sack Powell, which may not be legally possible, but which Trump often floats regardless.
Between September and December last year, the Fed's committee of twelve rate-setters voted to lower the US benchmark interest rate three times from its post-Covid-peak of 5.25pc-5.5pc, in increments down to 4.25pc-4.5pc. But much to the president's frustration, rates have since stayed put.
The Bank of England, meanwhile, has cut rates four times since last summer, including as recently as May, while the European Central Bank has enacted no less than eight eurozone rate reductions over the same period, the latest in June.
Having held rates since the start of 2025, the Fed just did so again when governors met last Wednesday (although two Trump-appointees voted against, the biggest intra-Fed rate disagreement in thirty years).
Fed policymakers are rightly worried about price pressures, with headline inflation hitting 3.7pc during the year to June, up from 2.4pc the previous month and well above the 2pc target.
And Trump's era-defining slew of tariffs – taxes on imports into the US – means we could see a lot more inflation yet. With the President's three-month moratorium expiring this weekend, and tariffs now set to bite on some of America's largest trading partners, the Fed is understandably concerned.
Powell insists the US economy is strong enough for the Fed to wait before further rate cuts, as we see if Trump's tariffs really do aggravate inflation. And last week's GDP numbers – a 3pc expansion from April to June – was certainly way above consensus forecasts, reversing a 0.5pc contraction during the first three months of the year, the worst quarterly performance since early 2022.
This January to March shrinkage, though, was largely due to the huge rise in US imports as buyers sought to get ahead of Trump's expected tariff onslaught. And since 'liberation day' in April, when the President unveiled his tariffs on the White House lawn, imports into the US have plunged.
This artificially boosted April to June GDP growth as the first-quarter trend unwound.
Yes, consumer spending rose 1.4pc during the second quarter, outpacing the 0.5pc increase over the previous three months, supporting Powell's argument the economy is coping without further rate cuts. But 'final sales to private domestic purchasers', a key demand metric that the Fed watches closely, grew just 1.2pc over the latest quarter, slower than the 1.9pc increase between January and March.
High mortgage rates are also holding back the housing market and related construction, as Trump relentlessly points out, with residential investment down 4.6pc during the second quarter. But that's part of a broader investment slump as business leaders look to see how the president's tariffs play out.
For now, the market consensus is that the US economy is showing resilience, but more rate cuts may be justified as long as inflation isn't further provoked. So Trump's attacks on Powell are based on legitimate economic analysis. Yet his language is way over the top.
Some say the president is picking headline-grabbing fights with the Fed chair to detract from mounting criticism over his handling of the Epstein files. I suspect he simply wants lower rates and, for now at least, Powell stands in his way.
Ironically, it was Trump who appointed Powell in 2017. But having repeatedly called for him to resign, the president seems certain to replace him when Powell's term expires next May.
In the meantime, Trump's ceaseless undermining of central bank independence is deeply damaging. Yes, the Fed has a 'dual mandate' to pursue both price stability and full employment, unlike the solely inflation-focussed aims of most other central banks.
But while Trump's arguments may be technically valid, it should absolutely not be him making them, nor anyone else near the top of government.
Given the tone he has set, though, Powell's successor will be seen as the president's lackey. And with US and global inflation far from tamed, that could end up being a serious problem.
My general view is that central bank independence is far more important than any individual central banker. Andrew Bailey, for instance, has shown seriously bad judgement at the Bank of England – endlessly insisting post-Covid inflation would be 'transitory', for instance, while deriding those of us who correctly predicted otherwise.
His appointment was a mistake, but he should stay, free from the threat politicians might remove him, until his term expires in March 2028. The same applies to Powell and far more so – he should serve his full term.