Zachary Karabell, who writes “The Edgy Optimist” on Substack, is a Post Opinions contributor.
On Sept. 16, the Federal Reserve increased its target short-term interest rate by a quarter of a percentage point, which is the usual increment when the central bank makes such decisions. This produced an immediate outcry from President Donald Trump, who declared on his personal media megaphone, Truth Social, that “Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World — BY FAR.”
Leaving aside the fact that the president should not be hectoring the independent Fed and that it has been his actions — tariffs and the Iran war — that caused the recent rises in inflation and energy prices, he does have a point.
Let’s stipulate — in an attempt to stop the spluttering — that if Trump is directionally right about rates, it is not because he has a savvy understanding of economics. If that were the case, he would have recognized that tariffs, combined with soaring commodity costs, lead to inflation, and that central banks will inevitably respond to inflation by raising rates.
But there is a legitimate question about whether that is what central banks should do. Systemic inflation is one thing. History has demonstrated that deep inflation can crush an economy and cause widespread harm to people who then cannot afford life’s necessities, let alone frivolities. Think of the U.S. in the stagflation of the 1970s or, worse, Germany in the 1920s.
Central banks and economists, however, have become so attuned to the dangers of inflation that they tend to focus on the short term and temporary rather than the long term and structural. They react to any inflation as a danger, and that can prematurely squelch healthy activity.
The problem, of course, is that it’s hard to know whether something is temporary or systemic. When Jerome Powell, then the Fed chair, held off raising rates in 2021 as post-pandemic inflation soared, he was lambasted for calling inflation “transitory.” Yet the most elevated levels of inflation were transitory. They were almost entirely caused by higher spending after the covid-19 pandemic and the surge in demand for goods and services that created bottlenecks in supply. The inflation just lasted longer than some thought the word “transitory” implied.
Now, with inflation elevated because of the White House’s ill-conceived policies, the U.S. is again in a cycle of rising rates — much of which is a market reaction and not caused by the Fed. In the past week alone, the yield for the U.S. 10-year Treasury note hit a nearly 20-year high of 5.29 percent. Since the beginning of March, rates have gone up more than 30 percent.
These sharp and rapid moves are not unprecedented, but they are rare. The movement is also global, and similar spikes have occurred with sovereign debt in Japan, Germany and Britain. The consequences are destabilizing and immediate: The cost of borrowing for everything from homes to cars to new businesses goes up, consumer spending gets pinched, and economic activity, however robust, becomes more expensive.
If, however, the reasons for inflation are clearly “transitory,” then it’s wrong to jump to raise rates. It is true that central banks, the Fed included, do not control the bond market. The big increase in borrowing costs around the world right now reflects what the market is doing, but central banks send signals that shape market behavior — and those signals now suggest that higher rates are coming because of inflation.
That is where the Trump argument becomes relevant: Trying to counter inflation that is caused by factors that are clearly transient — erratic tariffs and war — risks damaging the economic trajectory and the cost of living for longer than the negative effects of war and tariffs do. Rather than saving the economy from the perils of inflation, rising rates risk compounding the harms and making them last even longer.
Not raising rates now would fly in the face of the core tenets of central banks and of bond markets: that inflation is a demon to be slain at all costs. It would expose banks to the withering disdain that Powell received when he waited to raise rates in 2021, even though time has proven Powell more right than wrong. And it would also be a statement about the final issue percolating under the surface: that mounting government debt and deficits are the real looming danger.
Yes, government debt around the world is soaring. And yes, that means more tax dollars are going toward paying interest on that debt. The U.S. national debt is now more than $40 trillion and grows every year to fund Social Security, Medicare, defense and the rest of the federal government’s services. But government debt everywhere has been steadily rising for decades — especially since the 2008 financial crisis — and interest rates steadily went down during the bulk of this period. You could argue that a tipping point was reached after the burst of post-pandemic spending, and markets finally said enough is enough. But there is clear evidence that the current spike is a product of bad Trump administration policies and not long-term structural issues.
Trump is right about why rates should go down. Unfortunately, he is also the cause of them rising.
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