Editor’s note: This is a lightly edited transcript of today’s video from Daily Signal Senior Contributor Victor Davis Hanson. Subscribe to our YouTube channel to see more of his videos.
Hello, this is Victor Davis Hanson for The Daily Signal. There’s been a lot of controversy recently about the relationship between the chairman of the Federal Reserve, Jerome Powell, and President Donald Trump.
And the argument from the Trump side is that the economy does not show signs of inflation. People had argued, especially perhaps Powell himself, that the tariffs and a trade war and gargantuan stock increases would create inflation. Therefore, he had to keep interest rates high at about 4.3%, which translates into 30-year mortgages, over 7%.
On the other hand, Donald Trump said, “There’s no evidence there’s an inflation and we would like to get some stimulus to avoid a recession.”
In other words, why don’t you go down a point or maybe even two points in the manner that we saw at the early years of the Biden administration, before former President Joe Biden’s hyperinflation. Which the Fed, remember, was very slow to react. Former Treasury Secretary Janet Yellen assured us that inflation was nothing to worry about. That it was transitory. And the Fed was too slow. And we got up to a hyperinflation in 2022 of 9%.
In general, remember how the Fed works: If there is a fear of recession, they lower interest rates, so then people have easier access to money. So that stimulates them to spend and to acquire and then to avoid a recession. If there’s too much inflation, people are afraid that the economy will overheat and we’ll get a boom and bust cycle. And the value of our money will diminish. So, interest rates go up.
Trump’s argument, though, is that Powell is inconsistent. During March and April, when—to take one example—The Wall Street Journal was forecasting a “stock crash,” a “trade war,” “uncertainty over tariffs,” “anemic gross domestic product,” and all of the barometers, if you read paragraph after paragraph of story after story, it was doom and gloom in March and April.
At that point, you would’ve thought that Powell, who agreed, basically, with the consensus of the economic media and most of the economists, why didn’t he intervene in fears that they were right, that we were headed toward a recession and lower rates? Instead, he didn’t do anything. Now that all of those warnings turned out to be what? Nonfactual and incorrect. Suddenly, he hasn’t lowered interest rates.
What we’re getting at is that there is no sign of inflation. So, traditionally, if there’s no sign of inflation and the economy’s doing well and you want to make it even do better, why not go down a little bit?
So, what is going on? I think a lot of what’s going on—to finish—is that Jerome Powell has been in this fight with Donald Trump. He doesn’t understand “Art of the Deal” language. Donald Trump has called him “Too Late Powell,” criticized him personally. He’s dug down. And whether we like it or not, he’s acting emotionally or angrily to Donald Trump. And he has been under threat of being fired. He does not want to show that he’s going to back down and lose the independence of the Fed to the president.
The problem with that stance is it really hurts millions of Americans, who are trying to buy a home at 7% interest, when the economy is not inflationary. And we’re losing a wonderful opportunity.
More importantly is, remember, Donald Trump says he’s going to reduce the deficit, but he’s not going to touch Social Security. He’s not gonna touch defense, Medicare, but he’s gonna cut taxes and deregulate. So, until that stimulatory activity occurs and we get more revenue, we’re going to be in a shortfall that the deficit either will not be cut or it will rise.
So, what is Donald Trump trying to do? He is trying to look at nontraditional ways of raising revenue or cutting expenses. And therefore, getting closer to a budget that could be balanced.
No. 1: The Department of Government Efficiency people say that by the end of the year, they will cut $200 billion. That would be $200 billion off of a $2 trillion deficit. The tariff people, the secretary of treasury, Scott Bessent, says that we’re going to get an additional third of a trillion dollars, $300 billion-plus, in tariff revenues. With those cuts and those additions in revenue, we might have a—I don’t know—half a trillion dollars.
And Donald Trump, in his part, says, “Just lower the interest rate. And instead of paying $3 billion a day, we might pay $2 billion. And that over the year might save $300 billion.”
You see where they’re getting at? They’re trying to get up to $800 billion and therefore cut the entire deficit by 40% without raising taxes, without cutting Medicare, without cutting Social Security, without cutting defense. It’s pretty hard to do, but that’s the driving force behind the anger. It’s not just that Powell may strangle the economy, but that he’s killing Donald Trump’s initiatives by this $3 billion a day in interest rates.
Finally, Powell’s gotta kind of shrug off the attacks by Trump. His duty is, yes, it’s to be independent, but it’s to be consistent. He can’t show us that fears of a recession lead to lower interest rates and fears of inflation lead to highest interest rates. We should never raise interest rates 60 days before a presidential election—he did that on Sept. 18—or cut interest, either one. But he cut interest on the Sept. 18, less than two months before the 2024 presidential election.
In some ways, in conclusion, he reminds me of Merrick Garland. Merrick Garland, remember, was a Supreme Court nominee. And Sen. Mitch McConnell and the Republicans invoked in kind of a boomerang fashion the Biden rule that a lame-duck presidency, i.e., former President Barack Obama, could not nominate an 11th-hour Supreme Court nominee, which happened to be Merrick Garland.
They didn’t even give him a chance to come up for a vote. He was very bitter. And as a reward out of that bitterness, Joe Biden made him attorney general.
And we know from the Jack Smith special counsel and the Robert Hur special counsel what the Justice Department did as far as the FBI overreach, that he was a very bitter and very angry person who let the political animus shown toward him affect him, and he was not a disinterested attorney general.
Let’s hope that Powell learns that lesson, shrugs off criticism, and then shows a consistency through the Biden years and the Trump years that when he has data that show a stable or booming economy, he keeps interest stable or he raises them a little bit; and when he has a stable but weakening economy, in some ways, he lowers interest rates; and he’s oblivious and impervious to what comes out of the White House.
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