Donald Trump has called for a 3% interest rate cut on Truth Social, from 4.25% down to 1.25%. Would this work? It is clear he is publicly pressuring Fed Chair Jerome Powell. If Powell were to follow Trump’s idea, the Fed chair’s credibility would be destroyed and Powell might as well resign. On the other hand, if Powell refuses, it is unlikely he would be reappointed for another term. Either way, Powell is under immense pressure. The writer believes Powell will stick to his own policies to preserve his legacy and avoid becoming Trump’s yes-man.
Looking back at history, the Federal Reserve made a major mistake in 1971 under Chair Arthur Burns. At the time, Burns cut interest rates even while inflation was rising, a decision widely criticized in hindsight. Powell’s reluctance to cut rates now is not about defying Trump. It is because he is focused on fighting inflation. The full effects of tariffs have yet to emerge. Remember, there is a key deadline on August 1. Though the trade war has been ongoing since Trump’s inauguration, its true impact may only show in the third or fourth quarter this year. It is too early for Powell to make drastic moves. He must evaluate the situation carefully.
Why was there inflation in the 1970s? It stemmed from supply-side shocks. The oil crises pushed prices from $3 to $12 per barrel in 1973 and then to $39 by 1979. OPEC and Iran imposed oil embargoes on the West, creating a supply-side inflation spiral.
On August 15, 1971, President Richard Nixon held a marathon three-day meeting with his cabinet at Camp David and ended the Bretton Woods system. This system, established after World War II, pegged global currencies to the U.S. dollar and allowed the dollar to be exchanged for gold. Ending it decoupled the dollar from gold, leading to depreciation and higher import costs, a supply-side inflation driver.
Labor unions then demanded higher wages, which increased production costs. Companies passed these costs on to consumers, creating a vicious cycle of price and wage hikes. To combat this, Nixon implemented a 90-day wage and price freeze. This worked initially but soon backfired. With prices frozen, suppliers lost incentives to sell unprofitable goods, leading to shortages.
Such situations remind us of more recent concerns, like the potential shortage of Christmas goods following Trump’s Liberation Day tariffs. Many said Trump softened his stance on China because he feared the political fallout if American children could not get their toys for Christmas. Even if this is not as critical as chip sanctions, the damage to his prestige would have been significant. Again, this is a supply-side issue.
Inflation in the 1970s was not truly eliminated. It was only postponed and later resurfaced in another form. Nixon also pressured the Fed to ease monetary policy to help him win the 1972 election. This, combined with existing inflation, ultimately contributed to the 1973 oil crisis.
Today, the situation is also driven by supply-side factors. Given the recent CPI and PPI announcements, markets face an increasing risk of retreat as valuations are already elevated.