Per usual, my writing is inspired by my reading. And as has been in the news recently, President Trump wants to fire (probably illegally) Jerome Powell. Powell is the chair of the Federal Reserve Board and a key economic figure in the US Government. Powell was initially appointed by then President Barack Obama in 2012, before being made Chair of the Board by Trump in 2018 [1].
Allow me to steal some quotes from Wikipedia here:
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States.
... Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates.
... Its duties have expanded over the years, and include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and provides numerous publications, such as the Beige Book and the FRED database.
https://en.wikipedia.org/wiki/Federal_Reserve
So to summarize, it is the objective of The Federal Reserve to supervise and regulate the US financial system, banks, and overall create monetary stability for the country.
President Trump has not outright stated that he is going to fire Powell. However, it seems that the only thing staying his hand is that because The Federal Reserve is an independent agency, President Trump would have to fire him "for cause"; He can't fire Powell without a damn good reason. Trump has stated that he wants The Federal Reserve to lower the Federal Funds Interest Rate [2] [3], which would in turn lower the interest rate for all consumer debt. His reasoning is that the current interest rate is pricing young people out of first time home purchases [4].
I am one of those young people being priced out of a first time home purchase. But I think that lowering the Federal Funds Rate is a stupid move.
The Federal Funds Rate is the core mechanism that The Federal Reserve uses to stabilize Inflation in The United States [5]. Inflation is the increasing cost of goods and services as more money is introduced into the economy. More money means that each dollar is worth less, so prices increase.
We measure Inflation in the US through the Consumer Price Index. The CPI is a basket of common household goods and services, which is meant to represent the average American's spending patterns [6].
So follow my logic here. If we reduce the Federal Funds Rate, Inflation increases. If Inflation increases, the things we buy get more expensive.
This is a chart I made tracking the Consumer Price Index back through 1980. The dark blue line is the actual CPI metrics from the Federal Reserve [7]. The purple line is the year-over-year Inflation rate (scale on right).
The other three lines on this graph are projected CPI, based on various Inflation Rates. Orange is 0%, green is 1%, and light blue is 2%.
I want to highlight the massive bump in measured Inflation in 2020. We as the United States had aggressive expansionary monetary policy during COVID to help keep people out of poverty. But we are literally paying the price now. Our cost of living has increased significantly above the "expected" rate that we have been seeing since the 80s.
So what is the outcome of my three projected scenarios? At 0% Inflation, the CPI would be back on trend in mid 2030. At 1% Inflation, CPI is on trend sometime in 2045. And at 2% Inflation, we never see our purchasing power catch back up.
The scenarios that I've outlined here are pretty grim. At best, the cost of consumer goods in the US won't feel "normal" until 2030. Optimistically, 2045.
And if we don't keep a lid on Inflation? Possibly never.
A final, cynical note. If the Federal Funds Rate decreases, who do you think will actually be purchasing houses with those cheap loans? Young people who can barely afford groceries? Or Private Equity, who is already turning "The Family Home" into a thing of the past, and making us into a class of renters. Food for thought.
