Interest rates are in a good place, and Federal Reserve Chair Powell shouldn’t yield to President Trump’s lobbying to lowering them.

The Fed influences interest rates, it doesn’t set them.

It targets the federal funds rate—the overnight rate banks charge each other to borrow reserves that back up their deposits.

The Fed maintains the target rate—currently, 4.25% to 4.5%—by buying and selling short-term Treasury securities.

It creates and destroys money when it buys and sells securities. Through these interventions it influences the money supply in circulation and the structure of market determined interest rates for Treasury securities across maturities up to 30-years.

The 10-year Treasury rate is critical, as it’s the benchmark for rates on mortgages, other consumer and business loans and corporate bonds.

As of this writing, the 10-year Treasury rate is about 4.3%.

That’s not much different from the current federal funds rate, but it’s generally higher when the economy is healthy, growing and not shocked by events like Trump’s tariffs.

That higher rate reflects anticipated inflation and lost opportunities to invest for greater returns over the next 10 years—read expected inflation and real economic growth.

The 10-year Treasury rate hardly moves in lock step with the federal funds rate.

From September to December, the Fed lowered the target federal funds rate one percentage point. But investor were rattled by swelling federal budget deficits and pushed up the 10-year Treasury rate up by nearly a percentage point.

During the period between the Global Financial Crisis and COVID, the surge of inexpensive imported goods from China, a growing share of immigrants in the U.S. labor force and a downshift in consumer spending by households rebuilding balance sheets damaged by the GFC kept both inflation and interest rates abnormally low.

From 2009 to 2021, inflation was often less than 2%, and the 10-Treasury rate averaged 2.3%.

Before Trump’s recent tariffs kicked in, inflation was falling from its post-COVID surge. But the costs of reshoring some manufacturing and realigning supply chains away from China have raised the pace of inflation not likely to accelerate to about 2.5%.

Economists generally peg GDP growth that won’t accelerate inflation at about 2%.

Summing expected inflation and growth, and a 10-year Treasury rate of 4.5% appears to be about right.

The four decades prior to the GFC, the economy endured oil crises, President Nixon pressuring Fed Chair Arthur Burns to keep interest rates low and resulting surges in inflation, Fed Chairman Volcker reining in those excesses and then a period of stability that economists call the Great Moderation.

Inflation averaged about 4%, GDP growth was nearly 3% and the average 10-year Treasury rate averaged a bit more than the sum of the two, 7.4%.

Nowadays, with expected inflation and growth of about 2.5% and 2.0%, Fed policy, as indicated by a 4.3% 10-year Treasury rate, is close to where it should be in long-term equilibrium.

Of course, we live in the short-run—prices or unemployment rise with shocks to the economy.

Tariffs, more ubiquitous robots and spreading artificial intelligence threaten to boost both inflation and unemployment.

We simply don’t know in which direction the duck will fly and where Powell should aim his shotgun.

The most recent jobs report wasn’t encouraging.

In July, the economy added 73,000 new jobs, but too many of those were in health care and social services, which depend heavily on government financing. Private sector hiring elsewhere has been stagnant the last three months.

Likewise, the most recent readings for the Price Index for Personal Consumption Expenditures showed inflation still well above the Fed’s 2% target, and tariff sensitive categories like furniture, toys and clothing are surging.

Some retailers—most notably, Amazon—are exploiting the buzz about tariffs to boost prices for necessities manufactured domestically that shouldn’t be affected by import taxes. In contrast, Walmart has exhibited more restraint.

General Motors has absorbed about $1.1 billion in increased tariff costs by cutting elsewhere, accepting slimmer profits and limited price increases. However, rearranging its supply chains will take years, and stock market investors won’t tolerate lower profits for very long.

Businesses can mitigate higher costs by accelerating the buildout of artificial intelligence but that will destroy lots of white-collar jobs.

Soon, something has to give—either inflation accelerates or unemployment rises or both.

The mix should determine Fed policy, not presidential meddling.

Trump’s suggestion that the Fed should lower interest rates to 1% is a prescription for hyperinflation, and Powell is smart to ignore him.

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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.