08-11-2025
At the moment, the key monetary policy question is whether the Federal Reserve has judged the near-term outlook correctly and managed interest-rate policy appropriately.
Recall that Congress gave the Fed a dual mandate for price stability (which is interpreted as keeping inflation at the 2-percent target) and full employment (interpreted as sustained high employment growth). Coming into 2025, inflation remained stubbornly above the 2-percent target. With the president’s imposition of tariffs at a level not seen for 100 years, both mandates became endangered. Tariffs are an upward pressure on the price level — which will temporarily look like inflation to the casual observer — and a tax hike on consumers and businesses, which will be a headwind to growth in output and employment.
These dynamics are widely accepted. The hard part is determining how big the inflation and growth effects will be and how fast they will materialize. These are difficult judgments. And even if people agree on the profile of these impacts, they may still disagree on which is more important: inflation or employment growth.
So, it is unsurprising that any administration might disagree with the Fed and offer its advice on how to conduct monetary policy. Most administrations (I’ve worked in two White Houses) do exactly that — but in private and off the record. Hashing out these differences in public raises political pressure on the Fed to the detriment of everyone.
There is a large body of research documenting the finding that more independent monetary authorities produce better outcomes on inflation and employment growth. But how does the entry of politics matter? Let’s consider two recent examples based on the repeated public statements by the president and his administration officials arguing that the Fed should cut the federal funds rate.
Recently two prominent members of the Board of Governors and the Federal Open Market Committee (FOMC), Christopher Waller and Michelle Bowman, went on record as being favorably disposed toward rate cuts as soon as the July meeting.
In a CNBC interview, Waller said: “I think we’re in the position that we could do this as early as July. That would be my view, whether the committee would go along with it or not.” Similarly, the Financial Times quoted Bowman as saying, “All considered, ongoing progress on trade and tariff negotiations has led to an economic environment that is now demonstrably less risky. As we think about the path forward, it is time to consider adjusting the policy rate.”
The problem is that observers may not be confident that their decision is a judgment based purely on their evaluation of risks to the dual mandate. Instead, market participants may suspect that the governors are currying favor with the administration. Of course, this is not necessarily true. It is just that the pure monetary policy signal from FOMC members is being distorted by political noise. This predicament makes monetary policy, especially forward guidance, less effective, a situation that could have easily been avoided if the administration had not publicly commented on the Fed.
The second example is the president’s criticism of Chairman Jerome Powell for not cutting rates. This has led to open speculation that the next chairman-designate will be forced to cut a deal with the administration to lower rates in exchange for the nomination — which, true or not, undermines the credibility of any new chairman and, again, makes monetary policy less effective.
The Fed is harmed by these scenarios, but so is the administration. After all, it will be judged in the end by the quality of economic performance on its watch, and a politically independent Fed has the best chance to deliver good performance.
The Fed is a serious institution, engaged in serious (not to be confused with error-free) policymaking on behalf of the American people. It is in the best interest of the administration to be a partner in these efforts by not politicizing the Fed’s important work — or equally important credibility.
Douglas Holtz-Eakin is a Distinguished Fellow at Purdue’s Mitch Daniels School of Business and the President of the American Action Forum. He served as a senior economic and chief economist for the President's Council of Economic Advisers, and was the sixth director of the Congressional Budget Office. Doug blogs on The Daily Dish.
