The Congress established the Federal Reserve as a politically independent central bank, and shouldn’t enable the political class’s profligate spending.

Just about everyone, save creditors, likes lower interest rates.

Stock prices get a boost, business startups have an easier time attracting investors, homebuilders greet more eager buyers, credit card balances become less onerous to carry, and governments enjoy cheaper debt service.

Sitting presidents are often enthusiastic advocates for easy money, and President Donald Trump is passionate.

He’s appointed a White House staffer to the Fed board, and wants to fire Governor Lisa Cook even though she is one of its more dovish members.

Sadly, the president and congress are making the Fed’s job virtually undoable.

The Fed’s primary tool is its ability to set the federal funds rate—the rate banks pay each other for overnight loans.

To lower that rate, the Fed prints money to buy short-term government bonds. Adding liquidity to the bond market should pull down the 10-year Treasury rate, which importantly influences rates charged for business and consumer loans.

Nowadays, the Fed’s potency is more limited.

Since September 2024, the Fed has cut fed funds rate 1.25%, but the 10-year Treasury rate has risen from 3.7% to more than 4.0% .

With the economy is growing quickly—2^nd quarter GDP was up 3.8% and expect another good print is expected for the 3^rd quarter—the federal deficit should be falling. But it remains stubborn at about $1.8 trillion.

Simply, the president and congress aren’t inclined to curb runaway spending on health care and Social Security. Additional government borrowing exceeding 6% of GDP makes it difficult for the Fed to pull down the 10-year Treasury rate.

The artificial intelligence boom is instigating new investment spending—about 1.3% of GDP—that siphons off capital that could finance government and business borrowing.

Japan’s new prime minster is a big advocate of stimulative fiscal policies, EU members are borrowing more to spend on defense, and excessive borrowing is the central issue in France’s political crisis.

Western governments are printing new bonds at a torrid pace. All that new supply—along a with AI’s voracious appetite for capital—are driving up long-term rates in a manner that manipulating the U.S. federal funds rate can’t much effect.

U.S. inflation has been running near or above 3% for four years.

Conference Board, New York Federal Reserve Bank and University of Michigan surveys indicate the general public expects that level of inflation to continue, and lower rates would likely bake in permanently those elevated expectations

President Trump has several reasons to lobby the Fed to at least try to lower interest rates.

First, lower rates would reduce the interest paid by the federal government on outstanding debt. That’s now more than $1.2 trillion a year, and more than we spend on defense.

But lowering interest rates won’t do much good if the congress does things like make permanent the COVID-era health insurance subsidies and enhancements to Medicaid. Congressional Democrats are demanding that, and Republicans may have to accede to get a budget passed.

Second, lower rates could create a more robust labor market, but the biggest impediments to jobs creation are the president’s immigration and tariff policies.

Without immigration, the workforce will only expand at about 24,000 jobs a month. With the economy near full employment, it’s been creating about 27,000 jobs monthly since May.

Also, President Trump’s spending, tariffs and deportations are making international investors nervous about the long-term outlook for the dollar.

Gold has rocketed past $4,000 an ounce.

Investors are buying the precious metal to hedge against Washington and other western governments simply running the printing presses to finance the escalating costs for health care, social security and debt service. The resulting inflation would debase the real value of the dollar, other currencies and government bonds.

This fear has some foundation, because the only way the Fed could lower the 10-year Treasury rate and reduce the burden debt service imposes on the federal budget is to start buying long bonds again as it did during the 2008 financial crisis and COVID shutdowns.

Paradoxically, Treasury Secretary Bessent has criticized such quantitative easing, but it financed the crisis fighting strategies of two prior Republican presidents—President George W. Bush and President Trump 1.0.

Federal Reserve policymakers appear flummoxed about what to do next.

Like stern parents, they should tell the children at the White House and on Capitol Hill, you’ve overspent your allowance, and we have no intention of recklessly printing money to bail you out.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.