A relentless Trump battles a steadfast Powell on rate cuts. Who’s right?

The president is so peeved at Powell that he’s considering nominating a successor much earlier than usual who could serve as a kind of shadow chair before Powell’s tenure ends in May, The Wall Street Journal reported Wednesday night.

You can’t blame Team Trump for wanting borrowing costs to drop ASAP. Consumers and business owners wouldn’t mind a break either. The Fed directly controls short-term rates, which influence borrowing costs on mortgages, credit cards, and business loans.

“I’d love to hear an argument for why Powell cut rates 50 points right before an election but can’t do it now with inflation lower,” Vice President JD Vance said Tuesday on X.

Fair enough. Let’s look at the arguments for — and against — slashing rates now.

Where things stand: The Fed voted last week to leave its benchmark lending rate unchanged at about 4.3 percent.

The short-term federal funds rate hasn’t changed since December, following a full percentage point decline in 2024. Officials hit the pause button after inflation ticked modestly higher last winter.

More recently, inflation has been cooling, but the Fed is focused on what consumer prices will do when the impact of Trump’s tariffs becomes clear.

The big unknown: Will import taxes — now the steepest since the 1930s — lead to a one-time boost to inflation that the Fed could ignore? Or will they trigger a spiral of rapidly rising prices that would force policy makers to keep rates elevated?

The case for cutting now: Inflation — the reason the Fed drove up rates from near zero in early 2022 to a peak of 5.3 percent in July 2023 — is back in its cage.

• The Fed’s preferred price gauge — the personal consumption expenditures index excluding food and energy — fell to an annualized 2.1 percent in April from 2.6 percent at the end of last year. Its target is 2 percent.
• The federal funds rate is higher than necessary to prevent the economy from overheating.
• Lower rates would provide support for an economy that is slowing and a job market that is softening.

“Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market,” Michelle Bowman, the Fed’s vice chair for supervision and a Trump appointee, said on Monday.

Making the same point last week, Fed Governor Christopher Waller, another Trump appointee, also said he expected tariffs would boost inflation only temporarily.

But Waller dismissed a key argument Trump has voiced for immediately lowering rates: reducing interest payments on the national debt, which would balloon under his “One Big Beautiful Bill.”

“Our mandate from Congress tells us to worry about unemployment and price stability,” Waller said. “It does not tell us to provide cheap financing to the US government.”

The case for waiting: It’s too soon to assess the economic impact of tariffs.

• Rates could change significantly depending on the outcome of trade talks with other countries. But higher inflation is likely — even though it hasn’t shown up in the data yet.
• “Many firms, anticipating tariff hikes, accelerated shipments in February and March. This created a sizable inventory buffer, effectively delaying the moment when higher-cost goods reach store shelves,” Gregory Daco, chief economist at EY-Parthenon, wrote Wednesday on LinkedIn.
• While growth is slowing, the economy remains in solid shape with relatively low unemployment.
• Easing too fast would leave the Fed with little room to cut rates if the economy runs into real trouble.

Final thought: Despite Vance’s implication that the Fed cut rates ahead of the 2024 election to help the Democrats, the central bank is globally respected for remaining above the political fray.

We know Trump will hector anyone to get his way, but bullying Powell is a strategic misstep. If the Fed is seen as bowing to pressure, it will lose its credibility with investors — and its ability to effectively manage the economy.

“I think the Fed should be allowed to do its job,” said Mark Zandi, chief economist at Moody’s Analytics. “If it cuts rates too soon, before it is clear that inflation is not a problem, it will be counterproductive. Mortgage rates and other borrowing costs will go up, and not down.”

As much as we’d all like to see rates drop, we’re talking about waiting a few more months. The Fed is right to take it slow. If it’s wrong, we’ll all pay the price.

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Larry Edelman can be reached at larry.edelman@globe.com.