No One Knows What the Interest Rate Should Be
Since Donald Trump was re-elected, his hostility toward Federal Reserve Chairman Jerome Powell has intensified. He has publicly called Powell a “stupid person,” a “loser,” a “numbskull,” and even dubbed him “too late Powell.” Trump’s frustration centers on Powell’s reluctance to lower interest rates. In Trump’s view, rates are too high and are holding back economic growth. There may also be a secondary motivation: lower interest rates would reduce the federal government’s debt servicing costs by allowing it to refinance maturing debt at cheaper rates. Nonetheless, Trump’s primary grievance is clearly focused on spurring faster economic expansion.
Setting aside the issue of interfering with Federal Reserve independence (a topic I’ll address in a later post), Trump’s attacks, and the Fed’s own actions, highlight a deeper problem: no one truly knows what the "right" interest rate should be. As of June 2025, the federal funds rate sits at 4.33%. President Trump insists it should be closer to 2%. Meanwhile, pundits and analysts fill the airwaves and financial pages, confidently defending one side or the other, as if this question has a clear, knowable answer. But it doesn’t. How could anyone, whether it’s Trump, Powell, or the market commentators, claim with certainty to know the perfect interest rate for an economy that the World Bank estimates is worth almost $30 trillion and contains over 330 million people? This is precisely why central banking needs stricter and more transparent rules: to reduce the role of guesswork and personal bias in decisions that affect everyone.
The federal funds rate is the interest rate that banks charge each other for overnight loans of excess reserve balances. While it may seem like an obscure technical measure, it has far-reaching effects and shapes everything from mortgage and credit card rates to business investments and the stock market. Consider just two examples: In the automotive industry, car loan rates tend to move in tandem with the federal funds rate, directly influencing vehicle sales. In banking, this rate serves as the baseline for setting interest rates on both loans and savings accounts, rippling through the entire financial system. For most individuals, debt comes in the form of car loans, mortgages, student loans, or credit card balances—all of which are impacted by the decisions of the Federal Open Market Committee (FOMC). And yet, we entrust these critical decisions to twelve people voting behind closed doors? That should give everyone pause.
To be clear, I don’t claim to know the perfect interest rate either, and that’s exactly the point. No single person or institution should have the power to set interest rates for an entire economy. When that authority is concentrated in the hands of a few, it not only risks policy mistakes but also invites the kind of political attacks we’re seeing from Trump right now. Interest rates should be determined by the free market where it emerges organically from billions of individual decisions, not imposed from the top down by a central committee. The Federal Reserve’s outsized influence over credit, debt, and investment leaves the economy vulnerable to both political manipulation and economic instability. That’s a reality we should all take more seriously.
