That’s the claim in a Wall Street Journal op-ed.
Behind the Curve?
Please consider The Fed Is Behind the Curve on Cutting Interest Rates by David Malpass, undersecretary of the U.S. Treasury 2017-19.
My inline comments are in braces [ ].
Inflation slowed to 0.1% in May, providing another opportunity for the Federal Reserve to rethink its behind-the-curve interest rate policy. Many signs indicate that rates should be lower, but the Fed has chosen to keep the interest rate steady because of its limits-to-growth economic models.
[I do not believe that is the reason. I think the Fed is concerned about the very real possibility that tariffs may cause a jump in inflation].
The Labor Department’s May survey of households found 700,000 fewer people with jobs than in April, a clear sign of strain in small businesses. The prime interest rate is 7.5%, too high for most businesses. Credit-card interest rates are above 20%, a record high. The mortgage rate is prohibitive, driving up housing costs and rents. Monthly mortgage payments are at a record high, and builder confidence is down.
[All of that may be true, but where is inflation headed?]
Other major central banks, including the European Central Bank and the Bank of England, have cut their rates repeatedly in recent months, recognizing the global trend toward disinflation. The fed-funds rate, at 4.3%, is at least double the policy interest rates in Europe and Japan. President Trump’s tariffs have stopped China from dumping products here, but rather than reduce excess manufacturing, China has responded by dumping its products worldwide, exporting deflation. Global growth forecasts have slowed markedly, with the U.K. reporting a contraction in gross domestic product on Thursday.
This leaves the Fed as far behind the global disinflation trend as it was behind the inflation trend during the 2023-24 election cycle. These repeated lags in interest rates—driving through the rear-view mirror—harm the economy by widening the swings in inflation and interest rates.
[Is the Fed behind the curve or ahead of it?]
A clear path is available to the Fed to lower interest rates as Mr. Trump’s policies add critical manufacturing and energy capacity and give priority to a stable dollar as the world’s reserve currency.
[Actually, rate cuts would tend to weaken the dollar.]
Strong growth based on increased market-based production is fully consistent with the Fed’s dual mandate of price stability and full employment. Price stability leads to strong private-sector investment and job growth, which in turn fosters the robust production needed for price stability. It’s a virtuous circle that leads to lower interest rates, higher wages and improved affordability.
[How can anyone think we have price stability when no one really knows the impact of Trump’s on-off tariff policy]
Voters elected Mr. Trump not only to boost the economy but also to fix broken monetary policy, promote after-tax wage gains, and protect the dollar. The president champions the forgotten man, and his economic policies so far have been a home run. In a growth economy, small businesses can offer more jobs at higher wages and still make a profit.
[This one is a real hoot because it is crystal clear Trump wants to increase the deficit which would tend to weaken the dollar and stir up inflation.]
By contrast, the Fed’s models depend on slowing the growth rate to avoid overheating. The Fed is locked into high rates by a “limits to growth” fallacy—the idea that the U.S. economy has a low potential growth rate that shouldn’t be exceeded.
[Again, Malpass assumes the Fed is doing what it’s doing because of its models whereas I believe it is for other reasons.]
The Fed has created multiple obstacles to small business lending. The Fed’s regulatory policies guide banks away from small business loans. Further, its post-2008 balance-sheet policy of owning long-term government bonds favors government and big business at the expense of small and new businesses. The Fed is offering such high interest rates to banks (4.4%) and money-market funds (4.3%) that it crowds out small businesses. This limits the growth that is needed to pay for wage increases.
[The major thing “crowding out small businesses is Trump’s tariff policy and tariff uncertainty.]
Many innovative small businesses are confident in what they have to offer but can’t afford new investment, so they wait too. The risk is that underinvestment could impede necessary growth in domestic supply chains.
[They wait because none of them know what the hell Trump will do.]
As the Fed drags its feet, taxpayers also bear a huge cost because the U.S. government and the Federal Reserve are the world’s biggest borrowers in short-term credit markets. The Fed’s choice of high rates is adding rapidly to the government’s interest expense and the national debt. The Fed uses the loans it gets from banks and money-market funds to hold on to a $6 trillion bond portfolio that is deep underwater. Today’s Fed is effectively the world’s biggest hedge fund. Its losses are already $1 trillion and will grow until interest rates come down.
[The Fed’s losses are on paper an irrelevant. As former undersecretary of the U.S. Treasury, Malpass should know that. As for taxpayers bearing the cost, I agree. They are bearing the cost of inept policy out of Congress and a fiscally poor One Big Beautiful Bill proposal by Trump.]
The Fed is using the same demand-side models that have caused cycles of inflation and deflation since the 1970s. In these pages in 2002, I argued that the Fed hadn’t analyzed its deflation mistake of the late 1990s—the mistake that led to the Asian financial crisis and the 65% decline in the Nasdaq index—and was at risk of making repeated mistakes in inflation and deflation because of the lagging nature of its indicators. Those models need to be replaced with pro-growth, stable-dollar principles that can achieve both the Fed’s dual mandate and Mr. Trump’s vision of a strong, productive, high-wage economy.
[I sympathize with every criticism of the Fed. And I agree that the Fed has sponsored many boom-bust cycles. But Trump’s vision of a global economy and getting rid of the IRS based on tariffs is crazy.]
Is David Malpass Right or Wrong?
Should the Fed cut? I have no idea. Nor does anyone else.
But what we can see is Malpass is a rah-rah cheerleader for misguided Trump policies.
The reason we don’t know what the Fed should do is no one can possibly know what Trump will do or how the US and global economy will react to those moves.
Nor do we know what happens to the One Big Beautiful Bill.
If there is a reasonable chance for stagflation, and there is, then the Fed is best advised to wait.
The Fed absolutely does not want to make a move in the wrong direction.
Right now, my assumption is that if the Fed cut rates, the dollar would sink further and long-term yields would rise.
Technically, it appears that long-term treasury yields may explode to the upside.
Related Posts
April 5, 2025: Trump Wanted a Weaker Dollar, Wish Granted, Euro Highest Since 2021
Futures are in a nasty mood tonight except for a new record high in gold.
April 9, 2025: Trump Promises $1 trillion in Defense Spending for Next Year
Even bigger budget deficits are now in store due to the first $1 trillion defense budget.
On May 3, I commented Ominous Looking 10-Year and 30-Year US Treasury Yield Charts
The technical patterns on long-dated treasuries suggest rising yields. What about fundamentals?
Nothing has changed.
On May 6, I commented Gold Soars to Another New High, What’s the Message?
There are three messages. Do you see them?
Since then, gold has made many new highs. And it’s at another new high right now at $3,453 per ounce.
And as long as the bond market is unconvinced rate cuts are needed, so am I, especially with gold blasting to new highs.
18 trillion personal debt and 36 trillion federal debt! We need austerity either in the form of higher rates or reduced federal spending. We can’t afford tax cuts, spending or artificially low short-term rates.
It’s a trap!
Austerity begets a recession and fall in tax receipts at all levels of government. Debt sucks and inflation is the governments method of carrying it/paying it off.
Fortunately, I paid all of mine off over a decade ago and owe nothing to anyone!
Started with nothing in a world of opportunity!
Same as it ever was! Saaaaame as it ever was!
Demand has been pulled forward and if it ever catches up with the nations of the world there will be hell to pay.
At the end of the above post is commentary on gold being at record highs.
Todays economic and political uncertainty supports the price of gold and profits for mining companies. Costs are relatively fixed for miners and the dramatic increase in the price of gold falls straight to the bottom line. This has increased profit margins to amounts far higher than many of the Magnificent Seven and most AI stocks.
Yet the mining stocks remain out of favor and under-owned. This translates to “undervalued” in this readers opinion.
The average mining company received just under $2,950 per ounce during the first quarter of 2025. In Q2 they will average $3,300 per ounce. a full 10% gross margin but the net margin growth will be far higher.
This allows debt to be paid off, cash acquisitions, increases in share buybacks and increases in dividends. Credit ratings are going up and financing costs reduced.
Blah, Blah, Blah. You get the idea.
The problem here is that you get one month of low CPI or one month of good GDP growth and everyone is screaming for interest rate cuts. There should be a rule or thumb saying no cuts until 6 months of continuous growth or low CPI.
How fun is this discussion!
We have so many forces shaking the bowl of jello that it is truly hard to call the ball!
My position is to watch, listen, read and learn…
😉
Good news – inflation is coming down.
Bad news – world economy fall into recession
Trumps policies may sink the economy. Cutting rates early will only allow him to sink it more.
If his policies are so successful why would he need to lower rates.
Good post, and great embedded comments in the op-ed.
Is the Pope Catholic? Does a bear shit in the woods?
re: “Should the Fed cut? I have no idea. Nor does anyone else.”
You ease when money flows peak in Sept. It’s called N-gDp level targeting.
The rate-of-change in R-gDp doesn’t drop until Sept. Then inflation flows peak as well.
The longer the FED waits, the lower rates will go.
“Should the Fed cut? I have no idea. Nor does anyone else.”
I agree. I think the Fed is erroring on the side of caution in terms of Trump tariffs. I think they will pass in June & July. This will give them enough time to assess the labor market & price increases from tariffs. They can do an emergency cut in August or wait until Sept, if labor / inflation data supports holding the trigger that long.
However, I really don’t have a problem with Trump pressuring Powell. As usual, I’m not a fan of the bellicose statements, but I do think it keeps much needed pressure on Powell to pull the trigger as soon as continued claims push past 2M.
I think that’s their line in the sand. To me based on what I know about un-employment claims relative to the past 5 recessions, this is the level at which the Fed needs to act by cutting rates. The 64K question is where will inflation be?
Trump and any executive/dictator wants zero interest rates. It is borrowing tens of billions of dollars that dont have to be paid back till the rates start going up again. The rich and powerful people have now gotten used to being able to borrow huge sums of money, for free, to buy up whatever they want. Homes, apartment buildings, stocks, bonds, companies (1/2 of the NYSE has disappeared in the last 20 years — one half buying out the other half), mobile home parks, etc. This is a perk for the rich and private equity and hedge fund people that is NOT being talked about cause the real owners of America dont want anyone to figure out what theyve accomplished. And a lame brain like Trump just wants MORE of it — who cares about inflation? Dictators dont care about inflation … or civil unrest for that matter. Borrowed money is now all an artificial construct.
A Father’s Day miracle – I agree with you on this.
The exorbitant privilege of being able to borrow at no immediate apparent cost is ending.
Unfortunately we can expect the criminal segment of the elite class to find other creative financing schemes.
True. And high rates make mortgages and general credit very difficult for the middle class.
“Blessed are the young, for they shall inherit the national debt.”
― Herbert Hoover
Indeed, this looks like a suck-up job by somebody whose monetary policy framework‘s only objective function is to maximize his own chances to land a job in the Trump administration. With several stagflationary shocks (tariffs, deportations, Iran war oil shock) of unknown magnitudes in the pipeline, an out-of-control fiscal policy, and a possible significant increase in the real equilibrium interest rate due to AI productivity increases, the best course for the Fed is to wait and see.
When presented with fascism in your country, you have 2 options: Suck up, or fight.
Every man woman and child in the US spent an extra $1000 at the behest of the Federal government in the month of May alone. Imagine how that is goosing an economy that should otherwise be in recession. And much of that $1000 ends up in the hands of wall street. USA is cooked.
The US has a huge debt problem caused by spending much more than it takes in. This has been exacerbated by the fed spitefully defining its stable prices mandate as 2% inflation, keeping interest rates too low for too long making it too easy for congress to rack up debt, and Nixon removing fiscal and monetary discipline by removing dollar to gold convertibility. The linked article describes the current fiscal situation:
U.S. budget deficit hit $316 billion in May
A key statement from the article is: “After running a short-lived surplus in April thanks to tax season receipts, the deficit totaled just more than $316 billion for the month, taking the year-to-date total to $1.365 trillion.”
Our country’s problem with interest payments would be made easier with lower rates, but lower rates would incentivize congress to incrementally borrow and spend more which over time would more than offset any temporary gains from lower rates because the debt is never paid down. At 4%, every $2 trillion adds $80 billion annual debt service cost, pointing to the fact our debt and deficit load is now on an unsustainable path, compounding interest working against the US taxpayer.
I believe the above is enough reason not to lower rates. Maybe it is time for the Fed to quit over analyzing rate decisions and ask, “What would the free market do?”
Interest rates should be higher, given (shallow) economic numbers and historical norms. However, several rounds of financialization and debt-to-the-wazoo creation, in order to save the system, historical norms are out. There is only one way to go down this rabbit hole.
If Trump is stupid enough to believe the neocons and follow Netanyahu into an all out war with Iran Powell won’t be cutting interest rates. A cutoff of 20% of the world’s energy supply will be highly inflationary. Otherwise the ICE activity has terrorized half the population of LA. They are not going to restaurants or doing much. The 90% plus whom are citizens are not going out because they’ll be targeted by the color of their skin. Big economic impact here to the downside..
Californication.
Iran does not control 20% of the world’s energy supply. I suppose if they block the Strait of Hormuz they might block a fair chunk of OIL supplies, but nowadays oil is only a part of the energy picture.
Also, I was in the LA metro for the past 2 days, mainly in the Burbank area N of LA, and based on firsthand observation I’d say “no economic impact”.
Traffic was as bad as usual, and every place I went to was busy. Neither ICE nor the anti-ICE protests was having any impact I could see.
The one “No Kings” protest I saw was just a few dozen people having no visible impact other than casting some shade on the ground.
US interest rates will be forced to go up to 20%+ in order to save the US dollar.
Put the meth pipe down.
Anon is right. Wars for Israel aren’t cheap. It’ll take a lot of moneyprinting resulting in destruction of currency purchasing power.
Best path for the FED is to do nothing.
The fed is caught between a rock (Trump’s brain) and a hard place (Trump’s brain). Lindsey Graham on Face The Nation talking new sanctions bill against Russia and China for buying Russia’s oil. Doesn’t sound like any progress on any deal if that happens.
Don’t see how the Fed can cut given war in middle east, new possible sanctions, tariff tantrums, big beautiful spending, and other chaos.
The Fed is right where Trump wants them to be then. If the rock and the hard place are the same then there is no choice for the Fed. Is that what you are saying?
I’m saying anyone that is under 70 years old is royally screwed. It’s not all Trump’s fault but he will get most of the blame. He certainly isn’t helping to make anything better.
I repeat. Are you sayin the Fed has no choice in the matter? Don’t go all philosophical on me.
I think he’s reminding us of how badly he’s got TDS.
It’s hilarious that he can’t find one positive thing to say about Trump’s policies or actions by his administration.
I’m 58, and I feel great financially. My house is paid off. My OKLO & SMR stocks are doing great. I’m in good health. I bet you’re under 70 and your investments are killing it, right? Are you screwed?
Dude, I’m loving this golden age.
There’s a better chance that Lindsay Graham will impregnate a woman than get his secondary sanctions bill through. And the chance of either is zero.
As all of us can see Trump did not stop the wars in the Ukraine or the Middle East. Both situations are considerably worse now and Trump is both clueless and powerless to create anything resembling peace. Clearly Trump does not care about the genocide in Gaza or what will soon be genocide in Iran.
Trump is not alone in not caring about the people in the Middle East. Truth is, they do not have much to fight with or many close allies that can step up and help them.
The U.S. has them out gunned and a massive technological advantage. Most of us are glad that we are on the side that is winning. One minute Trump says we are not involved, the next he says we might go in, the next – we helped Israel. One fat wavering old gomer.
As regards interest rates? The bond market is and will be the tell. It will react before the Fed as it is more data sensitive. I’m watching the repo market for signs of instability. The Fed will dive in head first if cracks develop.
If the Iranians block oil transportation through the straights, it will be game on for inflation. Russia is already pumping oil and shipping it all over the world so the sanctions are relatively ineffective. That counterbalances the loss of production by Iran or transportation issues.
U.S. oil producers have cut their Cap-Ex and will see margins increase, so that is good for them and in particular the struggling small and mid cap producers.
We live in interesting times with many economic cross-currents making it hard to predict outcomes. This puts the pause on complex decision making…
In most towns the protests were calm and the people just went out to lunch afterwards. Basically non-events.
The Wall Street Journal is owned by Newscorp so it is no longer editorially independent. Just another source of information (with a bias). That said we are all biased and I have to read everything to remain even remotely well informed.
That’s why I read Mishe’s articles and all of the posts here…
Keep it coming – especially if you disagree!
I disagree on the definitions of rock and hard place, but agree on the overall view.
Congress will neither raise taxes nor cut spending. Trade flows are disrupted, and the fentanyl marches on, and the political sides are starting to take actual potshots at each other.
Of course they are, just like always. Inventory rising and sales decreasing in many markets.
Housing is one of the biggest drivers of economic activity. Build, buy, sell, repair, renovate, landscape, etc.
I don’t know why the fed is beating around the bush with rates, the emperor has no clothes. We all know inflation is the preferred STD of our economic mess, as we cant cancel the debt and we cant steal $36T.
I’ll concede that 3% rates will likely never happen again, but I’m sure we’ve all done the calculations. If rates went to 4.5% to 5%, the golden handcuffs would be unlocked and the housing market will go gangbustets.
The Fed is getting pulled in two directions. Economic inflation is falling, but long term interest rates have risen since the Fed started cutting this cycle. Interest rate changes and bond purchases don’t address the fear of currency debasement / debt default creeping into the bond market.
What was gold going for in $US ~ 50 years ago, for all the youngsters out there who are unfamiliar with the exponential function and money printing?
I know that my dad worked full time at a printer company making tv guides, my mom worked part time, we had a nice house, multiple cars, killer christmas(grandma gave us a $100 bill every year), family get togetheres most weekends, etc. I think, for us, things started to shift for the worse in the early 80s.
Flash forward, we never had kids, no family left on my side(the inlaws said I have them….well that was the one sisterinlaw thats been flirting with me forever), I work 50 to 60hr workweeks as a mfg supervisor making more than ever but yet not getting anywhere and have 37k in medical bills that my insurance claims they arent paying. And my property taxes have 3x in the past 10 years.
And now with the steel tariffs? How insanely stupid are these idiots!
Granted made some bad choices along the way but ive had some major setbacks including a bad accident that set me out for years.
I live rural and have a million things to do but getting older and only so much of me to go around. I have a spare residence next door but the county wont let me rent it out as its an ADU so its a 2000 sq ft dog house for my best friends.
Im seriously thinking about throwing the towel in and just get a farmhand in trade for rent and take a low paying easy job and just let the lawuits and 25% wage garnishment commence.
Great times. More inflation? Stick a fork in it.
Equally confession & indictment
The 80s to the aughts was the peak. Sad to know we’re over the hill, but good to know we saw the peak of civilization for probably 1000 years.
Jamming GNR now
Gold was $35 an ounce from the Roosevelt devaluation through the late 1960s.
Gold is almost $3500 an ounce today.
The dollar has lost nearly 99% of its value in 55 years.
If you’d prefer to measure in gallons of gas, the dollar has only lost 90-95% of its value.
Gas was around $0.3-0.35 in the late 1960s and very early 1970s.
Early 70s was paying 29 cents a gallon at a dock for the boat.
Used to dig in the couch cushions for go kart gas money. A couple quarters was an afternoon of fun. For 2 karts