Trump has high interest in the Fed lowering rates

Photo: AP Images

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ew people will shed tears when Jerome Powell’s term as chairman of the Federal Reserve Board ends next spring.

The Powell-led Fed hesitated to raise interest rates to tame America’s worst inflation in 40 years because Powell believed inflation would be “transitory.” He has been just as reluctant to lower rates substantially over two years as inflation eased.

With President Trump breathing down Powell’s neck to cut rates to reduce the estimated $1 trillion a year the US must pay to finance its $37 trillion national debt, Powell made a grudging concession at the Fed’s annual gathering in Jackson Hole, Wyoming, earning a standing ovation after suggesting he might consider a small interest rate cut when the Fed meets again in mid-September.

Having done so, some economists and members of the financial press believe that Powell and the Fed would be reckless to cut rates with inflation stubbornly above the Fed’s 2% target, especially when no one knows if the Trump tariffs will be inflationary.

Central banks usually raise rates when inflation increases, expecting that people and businesses will cut back on spending if borrowing becomes more expensive. This helps cool the economy and reduce inflation. Conversely, they lower rates when the economy slows down, hoping to motivate people to borrow more and stimulate economic activity.

Bankers are inherently conservative, and governments grant their central banks independence to determine monetary policy. That’s why Trump’s pressure on Powell — although it’s trademark Trump — is highly unconventional.

Some economists — admittedly still a minority — argue that the conventional wisdom is incorrect, and that raising interest rates increases inflation. More than a year ago, as housing prices kept rising and mortgage rates hit 25-year highs, Jack Manley, a global asset manager at JPMorgan Chase, told Bloomberg News that “a lot of what’s going on with inflation today can be linked very closely to interest rates.”

“You’re not going to see meaningful downward pressure on inflation until you begin to see meaningful downward pressure on shelter costs, and you won’t see meaningful downward pressure on shelter costs until the Fed lowers interest rates and mortgages come down to more reasonable levels,” Manley added.

We’re still waiting. Last week, Realtor.com reported that 30-year mortgages are averaging 6.75%, which is 4% more than in January 2021. They also report that the typical American household can only afford 28% of the homes for sale at today’s prices, while annual mortgage payments on a $320,000 loan have risen more than $7,000 a year since the Fed began raising rates in 2022.

More Losers than Winners

Powell takes flak from Trump, but he has delivered three rate cuts totaling 1% in the last year. In Israel, where annual inflation of 3.1% is just a touch higher than the Bank of Israel’s upper target of 3%, Governor Amir Yaron has only lowered rates once — by a meager one-quarter percent — since war broke out on October 7, 2023. His tight-money policy will not be sustainable if economic weakness persists. Israel’s Central Bureau of Statistics just released a preliminary report showing growth plunged by minus 3.5% in the latest quarter. Consumer spending and investments fell sharply during and following Israel’s 12-day war with Iran and rising war costs in Gaza.

Israeli banks aren’t hurting. Higher rates contribute to record profits as banks rake in larger mortgage payments on the adjustable-rate loans Israelis feasted on during the zero-interest-rate climate of the previous decade. Last week, Bank Leumi reported second-quarter profits of $2.6 billion and said it will pay shareholders a special 50% dividend.

That’s great news for bank officers and shareholders, but painful in a land plagued by chronic housing shortages and ever-rising home prices. High interest rates, which haven’t proven their worth in controlling inflation, lock first-time buyers out of the market, strain chareidi families whose parents split housing costs, and bust budgets even for dual-income families.

Prime Minister Netanyahu can’t pressure BOI governor Yaron the way that Trump threatens Powell. The attorney general would investigate if he did, claiming Bibi seeks lower rates to reduce his costs for financing his cigar and champagne habits.

Either way, Governor Yaron has job security until his term ends in the fall of 2028, while Trump is actively recruiting a successor for Powell.

Glenn Hubbard, a former chairman of the President’s Council of Economic Advisors under President George W. Bush, and now a nonresident senior fellow at the American Enterprise Institute, advised Trump as follows a few days before Powell’s Jackson Hole address.

“Instead of choosing Fed officials based on how they are likely to vote at the next rate-setting meeting, Trump should put more weight on intellectual and experiential diversity,” Hubbard wrote.

He also chided the Fed, contending it must begin to seek out and listen to dissenting views: “The Fed’s inflation mistakes… and other errors partly reflect the ‘groupthink’ to which all organizations are prone. The Fed would be more effective in dealing with a changing economic environment if it acknowledged and debated more diverse viewpoints about the roles of monetary policy and financial regulation in how the economy works.”

What’s Good Enough for the Pope

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nvariably, whenever a new pope is selected, readers ask me whether I think he will be good to the Jews. My stock answer is that the pope is paid to be good to the Catholics, and if he doesn’t harm the Jews, it’s a plus.

Having said that, the newly coronated Pope Leo XIV is now serving as the impetus for indirect tax relief to dual US-Israeli citizens.

There are exclusions and exceptions, but America taxes its citizens on their worldwide income, even if they don’t reside in the US, while Israel taxes its citizens based on their residency. As a result, many Americans who live and work in Israel, mainly for US companies or as freelancers, pay taxes twice on the same income to Social Security in America and to its Israeli counterpart, Bituach Leumi.

Enter Pope Leo. As an American citizen living in Vatican City, he is also subject to US taxation on his worldwide income. The Vatican doesn’t pay the pope a traditional salary, but he earns an estimated $30,000 per month in taxable perks and benefits.

Last month, Rep. Jeff Hurd (R-CO) introduced the Holy Sovereignty Protection Act (HR 4501) to exempt a pope from US tax obligations.

The American Citizens Abroad (ACA) advocacy group urges Congress to provide the same tax relief to about five million US citizens living abroad, a number that includes over 700,000 Americans in Israel, according to Mike Huckabee’s latest count.

“What’s good enough for the pope should be good enough for the [expatriate] community,” wrote ACA executive director Marylouise Serrato in a weekend email blast to ACA members.

Rep. Darin LaHood (R-IL) has introduced HR 10468, the Residence-Based Taxation for Americans Abroad Act, which would tax Americans overseas only on US-source income.

The ACA is lobbying to support LaHood’s broader measure.

Knesset Member Simcha Rotman introduced a similar bill to exempt dual American citizens in Israel from paying Bituach Leumi if they pay Social Security on the same income.

Rotman’s bill has stalled in the Knesset for over three years. Congress works at a snail’s pace, so the pope will need patience, and so will the Jews waiting to see if the pope has a positive impact on their take-home pay.

(Originally featured in Mishpacha, Issue 1076)