Trump has been calling for lower interest rates. He says Jerome Powell's reasoning for maintaining higher rates is incorrect.
Trump haters want the opposite of whatever Trump wants. As far as Trump haters are concerned, ANYTHING Trump thinks is wrong and motivated by his own ego and personal financial motives. But many others are starting to agree with Trump when it comes to the Federal Reserve needing to lower interest rates. I'm going to make a case for lower interest rates from a contrarian perspective.
There's a point where inflation can be deflationary. Costs can rise to a point where consumers are unable to maintain their purchasing levels, thus slowing demand and causing prices to come down.
There is indeed a concept where inflation can lead to a deflationary outcome through a chain reaction affecting consumer behavior and demand. The idea is that when inflation causes costs and prices to rise beyond what consumers can sustain, their purchasing power diminishes to the point where they reduce their spending. This reduced demand can then slow economic activity and lead to falling prices, which is a form of deflation.
Summary of the concept:
- Inflation is generally a rise in prices, reducing purchasing power.
- If inflation pushes prices too high, consumers may be unable to maintain their usual purchasing levels.
- This reduction in demand causes companies to lower prices to stimulate buying.
- When prices begin to fall broadly, this leads to deflation—a sustained decrease in the general price level.
- Deflation increases purchasing power but may signal economic weakness, leading to recessions or depressions.
- Deflation can trigger a deflationary spiral, where expectations of falling prices encourage consumers to delay purchases, further decreasing demand and pushing prices down.
- This dynamic shows how very high or runaway inflation can paradoxically initiate conditions that lead to deflation.
In short, inflation can become deflationary if it severely suppresses consumer demand due to cost pressures, causing prices to eventually come down as businesses adjust to weaker sales. This phenomenon is part of why central banks monitor inflation carefully and intervene to prevent extreme scenarios.
This explanation aligns with economic principles described by experts, noting that deflation often arises when demand fails to keep up with supply, sometimes triggered by very high inflation that consumers cannot sustain.
In such a situation it is possible to maintain lower interest rates because higher interest rates compound the problem and put too great a drag on the economy. it may not be as necessary to have high interest rates if there are other forces dampening demand.
It is possible and sometimes advisable to maintain lower interest rates in a situation where inflation is being dampened by other forces that reduce demand. Here’s why:
- Typically, central banks raise interest rates to combat inflation by making borrowing more expensive, which reduces spending and cools demand in the economy.
- However, if demand is already being suppressed through other channels—such as high price levels limiting consumer purchasing ability, causing slowing demand—the economy may naturally slow without needing high interest rates.
- In such cases, raising interest rates further could overly restrict borrowing and spending, putting an excessive drag on economic growth.
- Lower interest rates in this environment help avoid additional choking of economic activity and can prevent pushing the economy toward recession.
- Moreover, when inflation pressure is weak or demand is subdued, central banks may see less urgency to raise rates aggressively and may keep them lower to support manageable growth.
- This balancing act is part of why monetary policy decisions consider both inflation trends and underlying economic demand factors.
In summary, when inflation is high but demand is constrained due to other forces, maintaining lower interest rates may be preferable to avoid compounding the economic slowdown. Central banks aim to balance controlling inflation with supporting sustainable growth and avoid excessive tightening when natural dampeners on demand exist. This nuanced approach helps prevent excessive economic drag that could worsen downturn risks.
This understanding aligns with how central banks like the Federal Reserve modify interest rates based not only on inflation but also on the broader economic context of demand and growth conditions. Lower interest rates can provide relief when inflation is being offset by demand reductions rather than purely by monetary tightening.
Impacts of demand-side forces on interest rates:
The impact of demand-side forces on interest rates can be summarized as follows:
- Interest rates are influenced by supply and demand for money and credit in the economy. When the demand for credit increases, interest rates tend to rise; when demand decreases, interest rates tend to fall.
- Demand-side factors refer to how much consumers and businesses want to borrow and spend. High demand for loans and credit pushes interest rates up because borrowing becomes more competitive.
- Conversely, if demand weakens—due to factors like consumers being unable to spend more because of high inflation or economic uncertainty—borrowing demand falls, which tends to lower interest rates.
- Central banks, like the Federal Reserve, adjust policy rates in response to these demand conditions to balance growth and control inflation.
- Studies of recent economic periods show demand shocks have had a significant role in driving changes in interest rates, often more so than supply shocks.
- When demand forces reduce the appetite for borrowing, interest rates decline as banks respond to reduced credit demand.
- The interaction of demand and supply in credit markets determines the equilibrium interest rate, which in turn affects overall economic activity through spending and investment.
In brief, demand-side forces are critical in determining interest rate levels. Low demand for credit usually results in lower interest rates, while strong demand tends to push rates higher. Central banks monitor these dynamics to set rates that support economic stability and growth.
This is why interest rates may be kept lower in situations where demand is weak due to inflationary pressures limiting consumer spending—so as not to exacerbate economic slowdown by further restricting borrowing costs.
This is an argument for the Federal Reserve, lowering interest rates.
This reasoning forms a valid argument for the Federal Reserve to consider lowering interest rates or at least maintaining them at a lower level under certain economic conditions. Specifically, if inflation is high but primarily driven by cost-push factors that lead to suppressed consumer demand—resulting in slower economic activity and some downward pressure on prices—the Fed might decide that raising interest rates further would overly harm growth.
Lowering or keeping interest rates low in such a scenario can help:
- Avoid deepening the economic slowdown caused by weak consumer spending.
- Support borrowing and investment to sustain economic activity.
- Provide the economy room to stabilize without triggering a harsher recession.
- Balance controlling inflation risks with fostering manageable growth.
This argument highlights a nuanced approach to monetary policy where the Fed weighs the source and nature of inflation, the real state of demand, and the overall economic outlook before deciding on interest rate changes. It suggests that high interest rates aren’t always the best tool when inflation coexists with demand-side weakness.
Such a perspective is consistent with economic theory and the practical challenges central banks face in maintaining growth and price stability simultaneously. It underscores why the Fed’s decisions often depend on a broad set of indicators and economic conditions, not just inflation metrics alone.
Lower Interest Rates Can Provided Needed Relief
While inflation is tame by today's standards, there was a significant run up and inflation during the biden years. Household income did not keep up with inflation during those years. so consumers today I really hurting, they are behind. higher than called for interest rates. Compound the problem for consumers. whether it's the cost of carrying their credit cards or their mortgage and car payments, consumers could really use some relief visa v lower interest rates.
My analysis captures the real challenges many American households are facing. During the Biden administration, there was indeed a significant spike in inflation: from January 2021 to late 2024, prices rose by around 19-21%. However, typical household incomes increased by only 16-19% in that period, meaning most families fell behind in terms of purchasing power. This gap resulted in a real squeeze for consumers, leaving them poorer on average by the end of Biden’s term.
Federal Reserve interest rate hikes—implemented to tame soaring inflation—led to much higher borrowing costs. As a result:
- Mortgage and car payments became more expensive, straining family budgets further.
- Credit card interest rates climbed, making it harder for consumers to pay down debt.
- Overall discretionary spending dropped because more income was needed just to service debt and buy essentials.
Even as inflation cooled in 2024-2025, many households had not caught up from this period of financial strain. Higher-than-necessary interest rates under these circumstances compound the pain, reducing disposable income and holding back economic recovery.
Thus, a strong argument exists for interest rate relief today. Lower rates would:
- Ease monthly debt payments for mortgages, cars, and credit cards.
- Allow consumers to catch up, boosting confidence and spending.
- Counteract the lingering effects of earlier inflation that wages have not fully offset.
This situation underscores why lower interest rates are not just a technical monetary policy adjustment—they are essential for restoring household stability and supporting continued economic recovery for U.S. consumers.
High interest rates raise the U.S. federal deficit and debt through direct and indirect channels, but these effects must be balanced against the benefits of a more robust economy that can result from lower interest rates:
- Direct Impact of High Rates: The government’s interest payments on its national debt increase significantly with rising interest rates, with about $952 billion projected for 2025. Higher rates make debt servicing more expensive, consuming a growing share of federal revenues and increasing the deficit.
- Indirect Impact of High Rates: Higher borrowing costs slow economic growth by constraining business investment and consumer spending. Slower growth lowers tax revenues and increases demands on social safety nets, further worsening the deficit. Higher debt levels can also push rates higher over time, creating a challenging feedback loop.
- Benefits of Lower Interest Rates: Conversely, lower interest rates reduce debt servicing costs and support stronger economic growth by making borrowing more affordable for consumers and businesses. This growth can increase employment, wages, and corporate earnings—all of which generate higher tax revenues.
- Tax Revenue Boost: A more vibrant economy from lower rates leads to expanded tax bases and increased government revenue without raising tax rates. This can help shrink deficits and slow debt accumulation naturally.
- Long-term Fiscal Sustainability: While low rates ease near-term cost pressures, sustainable fiscal policy depends on balancing debt levels with economic growth. Lower rates that promote robust growth can improve fiscal health by raising revenues while controlling borrowing costs.
- Overall Balance: High interest rates impose fiscal strain, but aggressively raising rates may suppress growth and tax revenues, ultimately worsening deficits. A policy approach that considers the growth-boosting effects of lower rates alongside cost savings on interest payments tends to support stronger, more sustainable public finances.
In summary, while high interest rates directly increase federal debt costs, the broader economic context means lower rates can significantly benefit the economy and public finances by fostering growth and increasing tax revenues. This dynamic must be factored into assessing the true fiscal impact of interest rate policies.
The Federal Reserve Is Getting It Wrong, Again.
The Federal Reserve has developed a reputation for being late in adjusting interest rates, either in raising or lowering them. Here are two historical examples:
- Delays in rate cuts during recessions (e.g., the Great Recession of 2007-2009) led to prolonged market volatility and deeper economic downturns.
- During the 1990-1992 Gulf War recession, significant delays in cutting rates required a prolonged and aggressive easing cycle to stabilize markets.
BOTTOM LINE:
Trump is right -- Interest rates should come down. And they will. Members of his board are voting against him. Jerome Powell's days are numbered.
#TrumpIsRight