The Fed Resisted Trump. Can It Resist a Return of Inflation?

Opinion|The Fed Resisted Trump. Good.

Another Federal Reserve meeting, another loss for President Trump. And we should all be grateful for that.

A few hours ago, the Federal Open Market Committee voted 10 to 2 to reduce interest rates by just 0.25 percent, disregarding Mr. Trump’s regular exhortations that rates should be as much as two full percentage points lower. That follows a similarly modest reduction at the Fed’s September meeting.

Stephen Miran again dissented, arguing for a 0.5 percent cut. That’s to be expected given that Mr. Trump hastily appointed Mr. Miran, one of his former economic advisers, to the Fed just in time for last month’s vote. There was a surprise, however: Jeffrey Schmid, president of the Kansas City Fed, also dissented, but for the opposite reason: He wanted the Fed to hold interest rates steady.

Mr. Schmid’s unexpected vote may be a sign of growing concern about inflation. The central bank’s latest forecast projects prices will rise by 3 percent this year, significantly above its target rate of 2 percent.

The Trump-controlled Office of Management and Budget expects a more modest rise in prices: just 2.4 percent. But that strikes me as unlikely. The Consumer Price Index has risen by 3 percent over the past year and has been trending up, not down. And the full weight of tariffs could well drive prices even higher.

Mr. Trump’s view about interest rates appears rooted in his basic misunderstanding about how economies work. He regularly points to Europe, where the benchmark interest rate is 2.15 percent, compared to 3.75 to 4 percent here. But inflation in Europe is substantially lower and so is growth, giving the European Central Bank more leeway to reduce rates.

Additionally, the president doesn’t seem to grasp that the Fed only controls short-term interest rates. Longer-term rates on loans like fixed-rate mortgages and government bonds, which Mr. Trump cites as his biggest concern, are more influenced by what the market expects to happen to inflation.

The central bank also announced Wednesday that as of Dec. 1, it will at least temporarily stop shrinking its massive balance sheet. That will make more capital available to the banking sector and could help moderate rates slightly.

The Fed clearly disagrees with Mr. Trump’s rosy view of the economy. At its September meeting, the central bank issued a new set of projections that forecast tepid economic growth below 2 percent for at least the next three years, compared to 2.5 percent in 2024 under former President Joe Biden. For his part, Mr. Trump has argued that sluggish growth will be transitory as his economic magic takes hold.

Mr. Trump may have gotten a bit lucky. The current boom in spending on building data centers to accommodate the exploding use of artificial intelligence has added materially to the economy, by some estimates, around a third of current growth.

That, ironically, makes his call for lower interest rates still further from the mark. Should growth speed up, as he predicts, lower rates could significantly worsen inflation. The Fed is right to be disciplined.

The Fed adopted its 2 percent inflation target back in 2012, and Mr. Powell has never deviated from it. The Fed needs to maintain its credibility on this metric, particularly given that it projects that the 2 percent target will not be reached until 2028. As a New York Times reporter in the late 1970s, I saw how unanchored expectations — driven by a widespread belief among workers and businesses that price increases would escalate — helped inflation explode, with terrible consequences.

At the same time, I recognize that the job market is weak. While the government shutdown has stymied the collection of most economic data, government surveys through September and private sector data since then suggest that the economy has ceased creating jobs — and may even be shedding some.

That makes this small rate reduction — as well as the next one expected in December — understandable in the context of the Fed’s dual mandate to promote maximum employment and price stability.

A huge interest rate reduction along the lines of what Mr. Trump has been calling for would undermine the trend toward lower inflation and ultimately also undermine economic growth and jobs.

Mr. Trump’s effort to reshape the Fed has faced hurdles. So far, he has lost every court decision in his fight to remove Lisa Cook, a Fed governor appointed by Mr. Biden. The case is now before the Supreme Court, Mr. Trump’s last resort. His case in the court of public opinion has not been helped by the fact that his Treasury secretary, Scott Bessent, has reportedly called two different homes his “principal residence” at the same time — a charge similar to the one conservatives have leveled at Ms. Cook in the effort to oust her from her position on the Board of Governors.

Mr. Trump will soon get his opportunity to replace Mr. Powell with a different chair when Mr. Powell’s term expires next year. Mr. Powell could stay on the board, although no chairman has done so in many decades.

Mr. Powell’s tenure has not been perfect; he raised interest rates prematurely in 2018 (and then had to lower them) and failed to raise them soon enough when inflation began to soar during Covid. But on balance, he has been a clear-thinking, nondogmatic chairman and is certainly not deserving of the browbeating he has gotten from Mr. Trump, who refuses to recognize the critical historical value of Fed independence.

Whether Mr. Trump (who appointed Mr. Powell in 2017) chooses a nominee in that mold or picks a loyalist to do his bidding will be among the most consequential decisions that the president will make.

Of late, financial markets have been sanguine — perhaps overly so — in the face of global unrest, Mr. Trump’s erratic decision-making and economic uncertainty. A bad decision by Mr. Trump at the end of the “Apprentice”-style process he is running could easily topple the prices of both stocks and bonds.

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