[Financial Planning for the 100-Year Life] What Will Be the Outcome of the Trump-Powell Interest Rate Debate?

U.S. President Donald Trump and Federal Reserve Chair Jerome Powell are clashing over interest rates. In the short term, Trump is likely to win the rate debate, but in the medium to long term, the U.S. economy could experience severe difficulties, including inflation.

Trump has consistently criticized the Fed's high interest rate stance. He has described Powell as "someone holding back U.S. economic growth" and is pressuring for a rapid rate cut. Trump believes that high interest rates are a drag not only on consumption and investment, but also on the stock market. He also argues that higher rates boost the value of the dollar, which in turn increases the U.S. trade deficit. In particular, with the national debt now exceeding 120% of GDP, Trump is also motivated to reduce the debt burden by lowering real interest rates.

On the other hand, Powell is sticking to the principles of central bank independence and price stability. He has repeatedly stated that he will determine the rate path based on data, regardless of political pressure, making it clear that curbing inflation remains the Fed's top priority.

As Powell fears, the U.S. inflation rate is exceeding the target of 2%. The Personal Consumption Expenditures (PCE) price index, which the Fed considers most important in monetary policy, rose 2.5% in the first half of this year compared to a year earlier. As the effects of Trump's tariffs appear with a time lag, the probability of a higher inflation rate in the second half of the year is high.

However, another key Fed monetary policy objective, employment, has recently slowed sharply. In July 2025, nonfarm payrolls increased by 73,000, falling short of market expectations of about 110,000. Job gains in May and June were also revised down by a combined 258,000, to just 19,000 and 14,000, respectively. The employment rate, which is the percentage of employed people among those aged 15 and older, stood at 62.2% in July 2025, lower than the 2000-2024 average of 64.2%. In addition, the average duration of unemployment, which measures how long it takes Americans to find a new job after losing one, rose steadily to 24.1 weeks in July, up from a low of 19.3 weeks in February 2023. In the second half of this year, as consumer spending?which accounts for 69% of U.S. GDP?slows, all employment-related indicators could deteriorate further.

Under pressure from Trump to resign, Powell is likely to place more emphasis on employment than inflation and cut the federal funds rate at the September Federal Open Market Committee (FOMC) meeting, with further rate cuts likely at the October and December FOMC meetings. If this happens, the yield on the 10-year U.S. Treasury note could fall again and stock prices could rise starting in the fourth quarter of this year.

However, a rate cut would mean the Fed is expanding the money supply. The money supply is already growing faster than real economic growth. The key indicator here is the Marshall K (= M2/nominal GDP). The Marshall K jumped from 0.70 at the end of 2019 to 0.91 in the second quarter of 2020. This was because, when the U.S. economy plunged into a severe recession in the first half of 2020 due to COVID-19, the Fed slashed rates to nearly 0% and greatly increased the money supply. Analyzing the data since 2008, the Marshall K has had a significant impact (correlation coefficient of 0.75) on the consumer price inflation rate with a four-quarter lag. As the money supply expanded, the U.S. consumer price inflation rate soared to 8.6% year-on-year in the second quarter of 2022. As prices rose, the Fed raised rates and reduced the money supply. The Marshall K fell to 0.72 in the fourth quarter of 2024. However, from this low, it has gradually increased to 0.73 in the second quarter of this year.

If the Fed cuts rates at the September FOMC and even halts quantitative tightening, the Marshall K could surge again. Taking into account the lagged effects, U.S. inflation could rise again in 2026. In May next year, a new chair appointed by Trump will decide monetary policy. Will the chair nominated by Trump be able to run a tight monetary policy, contrary to Trump's wishes? Next year, the U.S. economy could experience severe pain from inflation. The credibility of the Fed's monetary policy could also decline, raising the probability of a sharp drop in the dollar index.

Kim Youngik, Adjunct Professor, Graduate School of Economics, Sogang University