President Donald Trump’s insistence that Federal Reserve Chairman Jerome Powell is behind the curve and should lower interest rates immediately has been criticized by the usual suspects. A close examination of the inflation record since Trump’s inauguration, though, shows he’s right.

The Fed has a dual mandate to maintain stable prices and encourage low unemployment. Since it successfully quashed the 1970s-era stagflation, it has consistently tried to balance those goals by setting a clear inflation target and shifting interest rates up or down in response to clear economic trends.

Recommended Stories

• The true cost of today's 'free' public education
• The war on timber towns is very real
• We need an Operation Warp Speed for AI

That target, roughly a 2% annual rise in core prices excluding the volatile food and energy segments, has remained constant for years. Thus, the Fed, regardless of who the chairman is, has tried to run a tight monetary policy when the rate is above that target and feels emboldened to run a loose policy when it remains at or below that figure.

The common wisdom is that the core inflation rate remains above 2%, and thus, Powell’s stance that interest rates are at the right level is justified. That wisdom is based on the annualized increase as presented either by the Consumer Price Index or by another measure, the Personal Consumption Expenditures database.

This analysis is flawed, however. Inflation in both measures has sharply trended down since Trump took office. The annualized increase in the CPI’s core index in the five months since January is a mere 1.9%, while the core price index in the PCE has risen by a mere 1.2% annualized rate over the last three months.

The headline rate is above 2% in both indices only because of higher inflation rates accruing from the Biden administration. Remove those, and Trump’s inflation-cutting record is clear.

That opens the way to lower rates, which is precisely what Trump calls for.

How much should rates be cut? That depends on how high the so-called “real rate of return” should be.

Central banks typically set rates above the inflation rate to provide investors with a return above what is needed to offset price hikes. Data from the Federal Reserve Bank of St. Louis show that this premium tended to be around 2.5% between 1960 and 2008, except during recessions and when the Fed ran a tight policy to crush 1970s-era inflation.

The Great Recession ended this practice, with the Fed running a very loose monetary policy between 2008 and the pandemic. For most of that period, its near-zero short-term interest rate policy meant investors lost money when they saved it, an ultra-loose policy that fueled spending and re-inflated the economy after the financial crash.

The post-pandemic inflationary spurt pushed Powell to reinstate a positive real rate of return for the first time in nearly fifteen years. But it has rarely risen to the historic 2.5% level. Indeed, the one time it did in the summer of 2024 was followed by a 50-basis point rate cut in September and two additional cuts later that year.

That post-pandemic record implies that Powell thinks a real rate in the 1.5-1.75% range is sufficient to control inflation and keep the economy humming.

Applying that rate to the Trump-era inflation record means the Fed should cut rates now. The current Fed target is between 4.25 and 4.5%, with an effective rate of 4.33%. If annual core inflation is only 1.9%, Powell’s implied preferred real rate means the Fed’s target rate should be between 3.5 and 3.75%.

That’s a 75-basis-point cut, massive in the world of global finance.

A cut of that magnitude would ripple throughout the economy. Bond prices would rise, as they move in the opposite direction of interest rates. Stock prices would likely increase too, as they usually do in response to Fed rate cuts. Mortgage rates would come down, making buying a home more affordable.

This is why Trump and his team are angry. They see their policy succeeding, but Powell’s hesitation is holding back the economic growth they are unleashing.

POWELL SENDS LETTER TO WHITE HOUSE DEFENDING $2.5 BILLION FED RENOVATIONS

Powell might respond that the uncertainty over Trump’s tariff policy justifies his caution, but the record suggests otherwise. Tariffs have already been up during Trump’s brief tenure, yet the core inflation rate for goods excluding food and energy is down from Biden-era levels. That rate is currently running at a 1% annualized rate, with lower prices for new and used vehicles.

The Fed is legally independent from political control, so Trump can only rail on Truth Social for now. But soon one of two things will happen: either inflation will pick up, justifying Powell’s caution, or the embattled Fed chief will finally see the light, start following the data, and give Trump the interest rate cuts his record so far has merited.

Henry Olsen is a senior fellow at the Ethics and Public Policy Center and a veteran political analyst. He hosts Beyond the Polls, a podcast about American elections and campaigns.