Can Trump get super low interest rates by replacing Jay Powell?

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs comments on recent speculation about Federal Reserve Chairman Jerome Powell’s replacement and Trump’s efforts to get lower, even 1% interest rates.

Trump: "Lower that to one percent"

Longtime readers of Cautious Optimism have probably noticed the Economics Correspondent’s columns lean heavily towards money, banking, and central banking. So given all the recent headlines about Donald Trump’s criticism of Federal Reserve Chairman Jerome Powell it seemed like a good time to discuss whether or not replacing Powell will clear the way for super low interest rates.

First a little background. Despite his heavy criticism of Jay Powell, the Fed chairman was actually Trump’s pick to head the central bank back in 2017, beating out former Fed governor Kevin Warsh and Stanford economist John Taylor (both Milton Friedmanites). At the time the press speculated Trump chose Powell because he was a Republican, but so too are Warsh and Taylor.

Once Powell cleared Senate confirmation Trump quickly called on him to lower interest rates to zero or even negative rates. Powell ignored those pleas, instead continuing the Fed’s ongoing gradual incremental rate hikes from seven years of zero under Barack Obama plus a meager one-quarter percent in 2016.

Some conservatives began to suspect the Powell Fed was deliberately acting to hurt the economy, and by extension Trump. However the stock market got spooked by rising rates in late 2018 and the Fed immediately stopped hiking followed by three rate cuts in 2019.

When Covid struck in early 2020 the Fed slashed rates to zero, suspended all bank reserve requirements, and flooded the banking system with trillions of dollars in reserves above the 2008 Fed’s record response to the Great Financial Crisis.

The Correspondent sees all these moves as consistent with the Fed’s playbook—a flawed playbook in his opinion but nevertheless consistent—and not those of a central bank conspiring to politically destroy a president. If the Fed really wanted to hurt Trump it could have continued hiking in 2019. Or handed the golden opportunity to sink a vulnerable president the Fed could have refused to slash rates during the 2020 election year pandemic, but it didn’t.

Fast forward to 2025 and Jay Powell’s second term is almost complete, officially ending in May of 2026.

Everyone knows Trump won’t renominate Powell and the focus has shifted to his potential successor. Will it be Treasury Secretary Scott Bessent? Director of the White House National Economic Council Kevin Hassett? Whoever it is, many believe he or she will have to toe Trump’s superlow interest rate line to get nominated since he’s said repeatedly rates need to come down to as low as 1%.

By now CO Nation probably knows the Economics Correspondent is no fan of the Fed and believes interest rates should be set not by the Fed, but by the free market of supply and demand. That is: the supply of loanable saved funds and demand for loans intersecting at whatever interest rate allows all savings to clear the credit markets, not by edict of a handful of PhD technocrats guessing every 45 days where to set by far the most important price in the economy.

The Correspondent also thinks Powell turned out to be a pretty clueless Fed chair in his first term. For example, when inflation took off in 2022 Powell was asked in Congressional testimony whether continuing to expand the money supply at a 12-13% annual clip had anything to do with rapidly rising prices.

In an answer that Kevin Warsh recently said would have “outraged” the late Milton Friedman, Powell answered the ballooning money supply had virtually nothing to do with inflation.

”There was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time... the correlation between […] M2 and inflation is just very, very low.”

-February 2022 (when annualized inflation was at 7.1% and still rising)

Later that year Powell reversed himself, stating:

”We now understand better how little we understand about inflation.” (June 29, 2022)

Today inflation is still running above the Fed’s 2% target, and as some in CO Nation think the government is reporting lowballed inflation numbers the Economics Correspondent personally thinks forcing the Fed’s policy rates down from 4.33% (as of July 21) to 1% is a bad idea. However the focus of this column is primarily on whether or not Trump’s new Fed chair can make 1% interest rates happen or not.

And in the Correspondent’s opinion, replacing Powell isn’t going to get Trump anywhere close because under the Fed’s voting structure one chairman just isn’t enough. 

Here’s how it works.

THE FOMC STRUCTURE

The Federal Reserve’s policy interest rates—the discount rate, interest on reserves (IOR)  rate, and the subsequent federal funds rate—along with the pace at which the Fed creates or destroys bank reserves by buying and selling securities, are all set by the Federal Open Market Committee (FOMC) eight times a year. This is the same meeting where Jay Powell announces on a Wednesday that rates are going up, down or not changing.

The FOMC was created by the Great Depression-era Banking Act of 1933, also known as the Glass-Steagall Act, and it has twelve voting members.

Although Jay Powell is chairman of the Federal Reserve System, he only has one FOMC vote.

And who are the others?

The FOMC is comprised of seven members of the Federal Reserve Board of Governors (of which Powell is one), the president of the New York Fed, and the presidents of four of the twelve regional Federal Reserve banks that change on a yearly rotating basis.

Side note: the Federal Reserve has a strange hierarchy where governors rank higher than presidents. Most overseas central banks are headed by a governor.

The Fed governors, just like the chairman, are nominated by the U.S. President and confirmed by the Senate. However, they serve fourteen year terms. Although the Fed chairman only serves four year terms, his governor seat lasts fourteen years.

So how many voting governors are up for exit and potentially replaceable during Trump’s term? 

Just two of seven.

Adriana Kugler’s term expires in 2026 and Powell’s term as governor in 2028.

Therefore five of the seven voting governors will not change under Trump.

As for the regional bank presidents, they serve five year terms and a few of those will expire during Trump’s term. New York Fed president John Williams’ term expires in 2026. A couple of others expire soon like the Atlanta (2026), Chicago (2027), and Dallas Fed presidents (2027).

However most of those presidents will opt to serve for another five year term, and even if they choose to retire the U.S. President has no say over who is nominated to replace them. New regional bank presidents are nominated by the regional bank’s Board of Directors and confirmed by the Federal Reserve System’s Board of Governors.

So let’s say Trump nominates a new Fed chairman who agrees to do his bidding and push interest rates down as far as the White House asks.

First we have to assume that, like some Supreme Court justices or even Jay Powell himself, the new Fed chair doesn’t just tell the President what he wants to hear and, once he’s in office (sorry for the PC crowd, I’m just going to use “he” to make it easier from here on out), decides to march to his own beat.

We also have to assume that if, as nominee, he’s suspected of advocating super low interest rates he doesn’t fail to secure enough Senate confirmation votes.

Then, if he survives all that and really does want to cut rates to 1%, he’s still only one voting member on a policy committee of twelve. Granted, the chairman has more influence on the committee than any other single member, but if his policy is viewed as too radical he can be, and historically has been, outvoted by his colleagues. 

This famously happened during the Jimmy Carter presidency. Carter handpicked Fed Chair G. William Miller, an industrial CEO with no experience in money or banking matters which made him malleable to White House direction. Carter demanded a high inflation policy that he believed, incorrectly, would end a decade of stagflation. At first Miller accommodated with a faster and faster printing press and even pushed for more when inflation had surpassed 10%. Eventually the ultra-dovish Miller was being outvoted by the rest of the FOMC and he was replaced by Paul Volcker.

Meanwhile Trump will have minimal influence over the other eleven FOMC members.

Five of the seven governors are going nowhere during Trump’s term because their terms don’t expire until 2030, 2032, 2034, 2036, and 2038 respectively.

Most of the rotating regional voting presidents aren’t going anywhere either, although it’s possible that of the two or three whose terms expire soon some may choose not to stay on.

But then their replacements are selected by the regional Fed bank’s Board of Directors, not Trump, and confirmed by the Board of Governors. The Board of Governors has seven members five of whom aren’t changing during Trump’s term, so there’s no way he can load it up with allies to get a handful of voting Fed presidents he wants.

The bottom line is that simply changing one Fed chairman isn’t going to give Trump nearly the degree of control he wants over monetary policy. Absent a recession or crisis, Trump probably won't see 1% rates anytime soon.

And in this case, even though the Economics Correspondent is anti-Fed, that’s probably a good thing. Inflation is still too high, and pushing rates from 4.33% down to 1% will only accelerate the pace at which the Fed and banking system create new money.

Perhaps sometime soon the Correspondent will revisit the subject of money creation under our fiat banking/central banking system, a complicated subject in and of itself.

To learn more about the FOMC’s members, go to:

https://www.federalreserve.gov/monetarypolicy/fomc.htm

Why Don’t Republican Politicians Seem to Care About the National Debt?

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs provides a time-tested explanation why so many Republican politicians (and Democrats) talk a great talk about reducing the deficit but never back it up with action. 

Trump, Mike Johnson, and John Thune

Note: This is a continuation of an article posted in early 2023: “Yes, Uncle Sam Can Now Run $1+ Trillion Deficits Forever,” but updated with higher 2025 numbers.

Many in CO Nation have expressed displeasure with the Big Beautiful Bill’s projected deficits and spiraling federal debt. While most seem to like the tax cuts and the work requirement for Medicaid, projections of annual $2 trillion deficits for a decade are unpopular with conservatives who hoped for a change from Biden’s four years and $8.1 trillion of new debt.

WHY?

So why do so many Republicans in Congress seem to be OK with blowing up the national debt by another $20 trillion over the next decade?

Comments in CO articles suggest many Republicans in Congress are RINO’s.

They wouldn’t be wrong.

Other comments suggest some Republicans really want to cut spending but are afraid they’ll be punished by voters in the midterms, especially if they represent politically unsafe states or districts.

That wouldn’t be wrong either.

But a universal reason politicians virtually never mention is the cold hard math of debt devaluation using growth and inflation. Specifically, that politicians the world over are happy to drive up their national debts because they believe future economic growth and inflation will bail them out later.

And sadly, the math has worked in the politicians’ favor for nearly a century. For example, the imminent disaster that was predicted when the debt hit $2 trillion under Ronald Reagan never materialized, nor did "just around the corner" hyperinflation when the debt hit $10 trillion at the end of George W. Bush’s presidency.

To explain, let’s start with today’s numbers. 

As of Q1 2025 America’s nominal GDP was $29.9 trillion, meaning that by now Q2 nominal GDP is already well over $30 trillion.

The national debt—debt held by the public, foreign investors, and intra-governmental agencies like Social Security and the Federal Reserve—stands at a whopping $36.2 trillion.

So the public debt stands at about 120% of GDP.

Now throw in that nearly every elected politician, all Treasury secretaries going back to the 1930’s including Scott Bessent and Steve Mnuchin, and all Federal Reserve governors and presidents factor projected real GDP growth and inflation into their assessments of the debt and future deficits.

It works something like this.

Assuming real GDP—the inflation-adjusted value of all goods and services produced by the U.S. economy—grows an average of 2% compounded a year for the next decade…

And assuming the Federal Reserve succeeds in its mandate of 2% price inflation compounded a year for the next decade, something it has far surpassed going back to 2021…

Then in 2035 U.S. nominal GDP will be (1.02^10) x (1.02^10) = 48.6% larger, or $44.6 trillion

At the same 120% of nominal GDP, the national debt will be $53.5 trillion in 2035.

Since the national debt is currently $36.2 trillion, that means the Treasury can rack up $17.3 trillion more in debt over the next decade with no change in the overall debt’s size relative to GDP.

That’s an average of $1.73 trillion deficits every year with, according to politician thinking, no financial consequences; i.e. “sustainable.”

The two sleights of hand that make this work are of course growth and inflation.

The growth part isn’t great, but it’s not horrible either. It’s kind of like borrowing more today in anticipation of earning a higher salary in a decade, and if that really works out then at least it’s a halfway honest way to manage higher debt (if not a bit optimistic).

But the dishonest part is the inflation. Half the formula is debasing the real value of the debt by effectively robbing Americans of their money’s purchasing power via the printing press. In fact, the last four years the formula has been closer to two-thirds inflation since real GDP has risen 11.6% while inflated prices have risen by 19.4%. Hence inflation is appropriately called “the stealth tax,” a fiscal trick that goes all the way back to ancient Greece.

See Economics Correspondent’s articles on world history’s first debt-reneging inflations at:

370 BC
https://www.cautiouseconomics.com/2024/02/economic-history-05.html

Roman Empire
https://www.cautiouseconomics.com/2023/07/inflation-currencies33.html

If we embrace more optimistic projections from the White House and assume real GDP growth will hit 3% the numbers get even bigger.

Also if we assume, as many Cautious Optimism readers do, that the government’s official inflation numbers are lowballed, and factor in a higher inflation rate of 2.5%, the “sustainable” debt ceiling rises even higher.

Because with these new numbers U.S. GDP will grow in a decade by (1.03^10) x (1.025^10) = 72% higher, from $30 trillion to $51.6 trillion.

And a national debt equal to 120% of $51.6 trillion will be $61.9 trillion.

Yes, assuming 3% GDP growth and 2.5% inflation, the national debt can grow by $25.7 trillion over the next decade with no change in its size relative to GDP. That’s $2.57 trillion average deficits for the next decade.

Now obviously the Economics Correspondent doesn’t approve of this sleight of hand, but it’s a trick Washington, DC has been using since at least World War II and you should be aware of it.

A big moral problem is this debt “sustainability” uses the central bank to rob Americans of their money’s purchasing power year after year. A practical problem is it assumes these economic growth rates can be sustained ad infinitum with no “speed bumps” to slow them down like a recession or a crisis.

As evidence during Trump’s first term the economy did manage to grow close to 3% a year, about 2.9% for the first three years, despite rising interest rates. Then in the last year Covid and lockdowns came and the entire formula was blown up. By the time Trump left office the debt-to-GDP ratio, which had stayed fairly stable during his first three years, had spiked from 102% of GDP to 124%.

And why is the debt-to-GDP ratio down slightly to 120% today? All that inflation during the Biden years courtesy of the Fed.

Perhaps the only saving grace is that every time media reporters, who were silent during the colossal Biden deficits, scream “the Trump plan could add another $3.9 trillion to the national debt” you know how small these numbers really are within the context of the government’s debt and inflation game. That is, the media is trying to shock viewers with a number like 3.9 trillion without mentioning that, under the same CBO forecasts, the debt-to-GDP ratio will barely move.

Finally, two quick corroborations of this cynical math from 20th century U.S. history.

PROOF IN HISTORY

1) At the end of World II the federal government had accumulated what was by far the largest debt in American history—both in nominal terms and as a share of GDP: $260 billion or 120% of GDP.

To Americans in 1945 these numbers were unbelievable. Many people doubted the debt could ever be repaid.

Today tax-and-spend Democrats love to tell us “Eisenhower embraced 90% tax rates to pay down the debt,” but in fact the debt was never paid down. By the time Jimmy Carter left office the national debt had nearly quadrupled to just shy of $1 trillion.

And from 1945 to 1980 the federal government ran deficits for 27 of 35 years which is not paying down anything.

Yet while the debt nearly quadrupled, the government’s fiscal position managed to improve dramatically. The debt-to-GDP ratio plummeted from 120% in 1945 to a meager and very manageable 31% by 1980.

And how did that happen? America’s nominal GDP grew from $228 billion in 1945 to $3.0 trillion in 1980.

Did the American economy really grow thirteen-fold in 35 years? No, it grew about 2.8-fold due to population growth and productivity increases.

But what really bailed the government out was inflation: prices rose 360% over the same period courtesy of the Federal Reserve. Hence 180% real GDP growth plus 360% inflation resulted in a thirteen-fold growth in nominal GDP (2.8 x 4.6 = 12.9).

2) Lastly, this strategy of using growth and inflation to keep racking up government debt for years, decades, and even forever was not only well underway by the 1940’s, it was openly advocated by economists, usually of the big-government persuasion.

Harvard’s Alvin Hansen, a famous economist known as “the American Keynes,” wrote in the 1940’s that:

“It can be shown mathematically that if the government continued to borrow indefinitely on the average X per cent each year of the national income, and if the rate of growth of increase was Y percent (of the national income), and if the average rate of interest on government obligations continued at Z percent, then the interest charges would never exceed A percent of the national income. In other words the government could continue to borrow, on average, X percent of the national income indefinitely without the tax burden, caused by the public debt, ever rising above A percent of the national income.”

But politicians will almost never make statements like this because they don’t want the public to realize that inflation is not “good for you” or “optimal for a market economy” as we’re told by government technocrats and Ivy League economists, but rather because it’s their main tool for running giant deficits while minimizing real repayment.

WaPo/Great Depression "expert" predict Trump's tax cuts will create another Great Depression... in 2017

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Now that the Big Beautiful Bill has passed and made the Trump 2017 tax cuts permanent, the Cautious Optimism Economics Correspondent wonders if anyone has seen this WP headline?

https://www.washingtonpost.com/news/posteverything/wp/2017/11/30/im-a-depression-historian-the-gop-tax-bill-is-straight-out-of-1929/

No, that’s not from this week. It’s from 2017.

Nearly eight years later and I’m still waiting for the next Great Depression the 2017 tax cuts were supposed to spawn.

From the author:

” In 1926, Calvin Coolidge’s treasury secretary, Andrew Mellon, one of the world’s richest men, pushed through a massive tax cut that would substantially contribute to the causes of the Great Depression.”

The author, a “Great Depression historian,” fails to mention Herbert Hoover’s giant tax hike in 1932—when the top income tax rose from 25% to 63% and all other income levels saw at least a doubling of their tax rate—that plunged the economy into Great Depression. The year after the tax increase was the worst year in U.S. economic history with the unemployment rate reaching 25.9%.

The Economics Correspondent has a copy of Robert McElvaine’s book “The Great Depression” and it’s hundreds of pages of “the free market doesn’t work” and “massive state intervention, mostly government spending, promotes economic recovery and prosperity.”