OPINION:
The Federal Reserve had few good choices when deciding to cut interest rates yet again.
The government shutdown left the Fed scarce on data.
On the basis of what was known about pressure on prices and trouble in labor markets and against the backdrop of unseemly meddling from the White House, it could have justified moving in the opposite direction, raising interest rates, or standing pat.
Inflation is not abating. At about 3%, it’s where it was last December.
During the years between the 2008 global financial crisis and COVID-19, deflation in goods-producing industries often offset inflationary pressures among service providers, but now both sides are raising prices.
President Trump’s first-term tax cuts, President Biden’s industrial policies and pandemic-relief spending raised the federal deficit from 3.1% of gross domestic product in 2016 to nearly 6.4% in 2024.
Thanks to the tax relief and net additional spending imposed by the One Big Beautiful Bill Act, deficits well above 6% are likely over the next decade.
The build-out of artificial intelligence — investments to advance large language models, develop agents that direct robots and replace white-collar workers, build data centers and expand electrical generation capacity to feed those — and accompanying stock market boom add to aggregate demand and inflation.
Initially, businesses absorbed much of the additional costs imposed by Mr. Trump’s tariffs. That couldn’t be sustained indefinitely, and those are now washing through the economy.
Normally, these conditions should warrant the Fed raising interest rates to curb demand and decelerate inflation, but circumstances are hardly normal.
Readings from the jobs market signal both shortages of workers and too few opportunities. On the one hand, we don’t have enough skilled tradesmen and STEM workers. On the other, white-collar workers displaced by AI face seemingly endless searches for new positions.
Since April, the private sector has added about 48,000 jobs a month, and that’s not dramatically less than what labor force growth could support, given declining indigenous population growth and the president’s tougher immigration policies.
Against all this, Fed Chairman Jerome Powell had to cobble together a consensus or at least a convincing majority among the 12 voting members of the Fed’s policymaking Open Market Committee.
A sizable group appeared cautious about cutting the interest rate further, but a vocal group, including candidates to replace Mr. Powell in May and White House economist on leave Stephen Miran, strongly supports Mr. Trump’s insatiable appetite for easy money.
The rate on 10-year Treasurys at 4% is already less than the likely pace of nominal GDP growth, real growth at about 2.5% plus inflation at about 3%.
The Fed pulling down that rate should lower mortgage and business borrowing rates, with housing and business investment being the primary conduits of a laxer monetary policy.
With so many restrictions on building apartments and land shortages for single-family homes, we must ask how much good that would do.
In the business sector, borrowing costs appear not to be an impediment to investment. Rather, it’s uncertainty about tariffs. The Supreme Court could strike down much of what Mr. Trump has imposed.
For AI, there appears to be no parallel barriers. Interest rates are seemingly irrelevant, with the tech giants earning and pouring in so much cash and venture capital investors bidding on startup projects.
Fiscal policies to boost aggregate demand — for example, additional subsidies for Affordable Care Act health insurance or payments to taxpayers to offset the impacts of the tariffs on real household income — would have to be financed by printing money.
The Treasury would issue more debt, and the Fed would have to buy more Treasury securities to sustain its interest rate target. It does that by running the printing press.
The bottom line is that fixing inflation and the jobs market requires structural changes of the kind that appear too odious or heavy for politicians with hands on the relevant levers.
These include immigration reforms to obtain workers with needed skills, tough love and restraint for white-collar workers displaced by AI, and zoning reforms around big cities.
For the remainder of Mr. Trump’s presidency, we can expect persistent White House pressure on the Fed to keep interest rates artificially low and nagging inflation.
In this environment, skilled tradesmen, AI talent, and the chosen few in finance and others in services who enable them will be charmed cohorts.
Almost everyone else will struggle under the weight of unforgiving job markets and inflation.
With so much dynamism from AI and inflation, equity investors should be the most charmed group of all.
Persistent inflation at 3% shouldn’t be menacing to them.
For the 40 years preceding the global financial crisis, inflation averaged 4.0%, the 10-year Treasury yield averaged 7.4%, appreciation on existing homes was 5.6%, and the S&P 500 return was 10.5% per year.
Put your money in stocks until sanity returns.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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