Since reentering the office of the presidency in January 2025, Donald Trump has been adamant that Federal Reserve interest-rate policy has been a disaster. He has ridiculed and attempted to browbeat Federal Reserve chairman Jerome Powell with words of sarcasm and threats of finding ways of removing him from his position before the end of his term in May 2026. Trump has wanted to fill the Federal Reserve Board of Governors with members more loyal to his wishes.
President Trump wants to lower interest rates by manipulating Federal Reserve policy to lower the Federal Funds rate — the rate at which banks borrow and lend to each other — of around one or one-and-a-half percent. This would reduce the interest rate costs for short-term government borrowing to cover the government’s deficit spending; if longer-terms rates were influenced in a similar downward direction, it would also reduce interest costs for both longer-term government borrowing and for refinancing existing government debt. In 2025, the federal government paid around $1 trillion in interest expenses on the more than $37.5 trillion in accumulated debt.
The president also wants lower interest rates to reduce the costs for private-sector borrowing to “goose” domestic investment spending and stimulate home buying through lower mortgage rates. The economy will boom through job creation, higher incomes and earnings, and by attracting foreign investors to build more in America so that Trump can show that he is keeping his promise of making the country “great again.”
Federal Reserve governors managing the economy
There has been pushback by a wide variety of economic-policy analysts, members of Congress, and media pundits that a Federal Reserve subservient to the president would jeopardize the institution’s independence of being separate from and above the changing winds and pressures of everyday politics. Only this independence, such critics emphasize, enables those appointed to the Federal Reserve board — after being nominated by the president and confirmed by the Senate — for a period of 14 years, longer than the political voting cycles — enables the Federal Reserve members to more dispassionately take the “long-run view” about which interest-rate policy and monetary policy would be more likely to ensure economic growth, full employment, and the general price stability of the American economy. (The chair and vice-chair of the Fed board serve for renewable four-year terms.)
What are these independent governors of the Federal Reserve supposed to do? They are supposed to use the most up-to-date macroeconomic models of how the overall economy is supposed to work, with the expertise of over 400 economists and an unspecified number of statisticians employed at the Fed to massage and analyze “the data,” to then decide what monetary policy and interest-rate policy would be most likely to meet it’s specified responsibilities of maintaining full employment and stable prices in the United States.
The rate of monetary change via the purchase and sale of U.S. government securities and other assets, and the (short-term) rates of interest most directly influenced by Federal Reserve policy, are to be used as “instruments” to try to move economy-wide output and employment in selected targeted directions while also shooting for a chosen price-inflation rate. The Fed governors might think of themselves as captains of the macroeconomic ship, using interest rates as a rudder to move the ship in the desired output and employment direction, while monetary changes are used like easing or trimming the sails of the ship to control the inflation rate of how fast the ship is moving forward.
President Trump and the current Federal Reserve Board of Governors differ as to what interest-rate changes should be focusing on and how the accompanying monetary changes should be applied to facilitate the achievement of the chosen shorter- or longer-term targets. But what is missed in most of the discussions, debates, and rhetorical exchanges is that both share a common institutional and policy premise: a government agency having the capacity to undertake monetary central planning.
Fed planning of the macroeconomy
Both want the Federal Reserve to control the supply of money and credit in the banking system with the capacity to influence the cost of borrowing funds for both private-sector investment and other spending, along with the power to facilitate the government’s budget deficits and the cost of the national debt. You want more spending with lower costs of doing so? Just increase the supply of money in the banking system and lower the rates of interest at which any new money may be made available to the private sector and the government. The interest rate is like a handle on a water spigot. Tighten it up too much, the flow of water slows down to a trickle; loosen it up, and the flow of water increases to whatever speed or velocity you desire.
The Federal Reserve, in its analyses and forecasts, frequently refers to different parts of the economy, such as the high-tech sector, or AI investment growth, or the housing market, or consumer spending and sentiment. But, in fact, the Fed’s general focus of attention suffers from the fundamental Keynesian fallacy of thinking about the economy in “aggregate” terms.
That is, the Fed’s focus is on U.S. output as a whole, employment in general, and movements in the average level of prices in the market. In my earlier analogy of the Fed governors being the captains of the U.S. economic “ship,” the goals of the governors include moving the overall economy in one direction or another toward the horizon (fast or slower growth); deciding how many of the crew hands should be “employed” on deck and trying to get as many of them doing “something,” (more “fully employed”); and regulating the general speed of the vessel through the water (determining whether prices should rise faster or more slowly to establish the desired rate of increase per year).
Now, if asked, the Board of Governors and their 400 economists would certainly say that below deck, the ship is divided into different compartments (the microeconomic sectors of the economy and their relative positions and composition). While, of course, the compartments may be used for different purposes, or filled with different cargoes, or with different numbers of crew members employed in one part of the ship compared to others, those things generally sort themselves out and are not the focus of Fed monetary and interest-rate policy. The latter is concerned with how much cargo as a whole is being carried, the total number of crewmen employed, and the speed at which the ship is traveling through the water.
Thus, the microeconomic relationships and patterns, while not irrelevant or completely unimportant, can be ignored for the most part, to focus, instead, on those wider macroeconomic magnitudes that determine the general “health” and prosperity of the U.S. economy as a whole. Determining those microeconomic relationships and patterns of relative consumptions and investments and employments are what the private sector mostly determines through the interactions of supply and demand, while partly influenced and directed by the spending, redistributing, and regulatory policies of the federal, state, and local governments.
The macroeconomy is a conceptual fallacy
The fundamental fallacy is that there is such a thing as the “macroeconomy” as a whole. Certainly we can count up how many shoes and hats and bananas and laptop computers have been produced and sold over a given period of time and multiply them by their respective market prices to have some accounting total of the market value of all the items produced and bought. And we can add up the number of people employed in each of these individual sectors of the economy to know how many of those defined as part of the “labor force” are employed. Finally, we can take a select group of prices in the market, say they are representative of the system of relative prices in general, add and average them, and then determine what the recent overall “price level” for goods and services has been and how it has changed.
The fact is that the aggregates and averages of macroeconomics do not exist. They are examples of what the British philosopher Alfred Whitehead long ago called “conceptual realism,” that is, treating concepts and ideas as if they were objects or things existing in reality. Such concepts as aggregate demand and aggregate supply, or total output, or the price level are creations of economists and statisticians. They do not themselves exist in the real world. There are the individual demands and individual supplies for different types of hats and shoes, or particular types of apples and onions, or canned corn and canned beans. But there are no such things as a demand for or supply of “output as a whole,” because output as a whole does not exist.
Every conceptualization requires some degree of abstraction from features of the real world. A road map may highlight the routes between various destinations while giving limited indication and description of the topography along the way, especially if it does not seem especially relevant to the travelers using the map.
The core concepts of sound economics
The central concepts in economics that orient virtually all, or at least most, thinking within the subject are: individual choice under conditions of scarcity; trade-offs between alternative uses of the possible means to pursue various desired ends; the weighing of the costs and benefits of options that seem open and of interest to the decision-makers, and those courses of action that appear more profitable; the inescapability of time in all human action; and, thus, the evaluation of possible goals and the ways of achieving them more in the present versus further in the future.
These elements, which are present in all conscious human activities, carry over when individuals may discover that there are potential mutual gains from trade in exchanging goods, services, and resources between themselves and others with whom they do or can interact. There have emerged systems of division of labor in which individuals specialize in and trade those things in which they have an advantage in producing for goods and services that others can provide to them at lower costs than if they produced those other things for themselves.
There develop increasingly complex and intricate networks of buying and selling under the general headings of demand and supply, held together through accompanying structures of relative prices for finished goods and the means of production. This is made possible and easier due to the emergence of a medium of exchange (money) for purposes of economic calculation, that is, determining what may be more or less profitable and least costly in the use of the scarce means of production that can be used in one way rather than some other.
Central to this understanding of economics is that there are “no free lunches.” Pursuing one goal or end requires at least a partial forgoing, or giving up, of some alternative that might have been pursued instead. If some of the scarce resources, including labor services, are used to build a house, it may be necessary to relinquish the opportunity to use those same resources and labor to build a bridge or have more manufacturing of cloth or research labs for finding a cure of cancer, or something else. And almost all of these choices and decisions are made at “the margin,” that is, the benefit of a little bit more of this at the cost of a little bit less of that.
Anyone who has taken a basic economics course will probably think or say, “So, what is so new about this?” A little common-sense application enables many if not most such students of economics to see the concepts and their relationships at work in the “real world” marketplace. Indeed, when British economist E. H. Phelps Brown delivered his presidential address before the Royal Economics Society in 1971, he said that when his former students came by to visit him, they almost always said that the most essential ideas that had stayed with them and assisted their “applied” work in their business-related professions were these core economic concepts and not any high-powered mathematical or statistical techniques.
Interest rates and market coordination
One of the most essential applications of the nature of trade-offs and the role of prices in incentivizing and coordinating the actions of multitudes of market participants is the role of the rate of interest as the inter-temporal price that links and balances the uses of scarce resources more in the present versus more in the future. There are those who have earned income and are willing to forgo its full personal use in the present in exchange for an offer of a greater amount in the future over the sum lent now. And there are those who wish to utilize that sum (and the resources that sum represents in terms of the purchasing power of the money borrowed) more over a period of time, and who are willing to offer that premium over the principal lent as a price worth paying at some future, agreed-upon date.
Market rates of interest link and balance savings and investment, the allocation of scarce resources with their alternative uses over time, the coordination of people’s differing time preferences for satisfying their wants more in the present versus more in the future. Market-established rates of interest tend to ensure a matching of the production and consumption of goods and services more in the present versus more in the future.
Interest rates, therefore, have market-based work to do. They assist in making sure, given people’s time preferences and valuations for satisfaction of their wants now versus later, that neither too much nor too little of what is demanded by people are produced currently or in the future. There has to be an incentivizing and coordinating set of inter-temporal prices to see that desired goods wanted today or years in the future are available by seeing to it that scarce resources are applied across time such that goods are produced and ready for use at different points in time.
Interest-rate manipulation a form of price control
All of this tends to be lost in the macroeconomic aggregates of total output and employment and the general price level. By summing up all demands and all supplies of all goods of all sorts into economy-wide total demand and total supply, it assumes away all real and relevant trade-offs that really do exist in actual markets and that determine the actual amounts of output and employment and the relative prices that influence these outcomes. Instead, the macroeconomist thinks in terms of an imagined increased aggregate output versus less and more aggregate employment versus less, and the general level of prices that may be connected to these figures, with no real causal linkages behind them.
The rate of interest, then, is easily seen not as a market price coordinating and incentivizing savings with investment, the use of scarce resources in the present versus the future, but as simply a policy tool to incentivize more or less spending, more or less hiring, more or less production as a whole. Little thought or attention is given to its microeconomic composition and whether in the very act of manipulating interest rates from where they would be if determined by competitive interactions of saver-lenders and investor-borrowers through the intermediation of banks and other financial institutions may throw the two sides of the market out of balance.
In fact, the Federal Reserve’s manipulation of interest rates has consequences no different than any other type of government price control, that is, setting a price at a level different from the one the competitive market process would have brought about. In the case of maximum price controls that make it illegal to sell and buy a particular good or service above the imposed price ceiling, a shortage is created because the quantity demanded by buyers is greater than the quantity suppliers find it sufficiently profitable to bring to market.
Now in the case of the Federal Reserve, if the Fed governors were to arbitrarily set a ceiling on the interest rates that lenders could offer to interested borrowers, with no increase in the supply of money in the banking system, those interested in borrowing would exceed those willing to lend their savings. Who would get how much of the less-than-demanded savings, and for what purposes, at the imposed maximum interest rate would have to be decided by some nonmarket criteria that would have be implemented by the Fed officials or those they appointed to do so. Investment would be very directly determined by what the Fed and other political authorities with “influence” considered the best investment patterns rather than borrowers’ judgments about anticipated future consumer demand and the relative profitability of those investments.
Monetary creation distorts savings and investment
Instead, the Federal Reserve moves interest rates in the desired direction by increasing or decreasing the amount of “loanable funds” available for banks to lend. It is monetary changes in the form, usually, of the Federal Reserve buying and selling of government securities and other assets that “nudges” interest rates in the desired direction by increasing or decreasing the amount of “reserves” in the banking system upon which financial institutions have the wherewithal to meet the demands of potential borrowers. The Federal Reserve fills the shortage of funds for loans that it created by increasing the number of dollars available in the financial market for banks to lend. More units of money creates the illusion that more real resources are available to fill the competing needs for which people would like to employ them.
This creates the seeming ability to make investment, production, and employment levels whatever the Federal Reserve decides to set as targets by just creating more money for people to spend. There is no scarcity problem other than when the economy as a whole starts reaching “full employment,” when a general price inflation might rear its ugly head. Now, of course, the process is not as “mechanical” as suggested. The Fed worries about whether monetary “easing” might make people nervous about future price inflation, which might counteract people’s willingness to borrow or lend at particular interest rates and to undertake investments and additional hiring because they fear that future price inflation may result in the Federal Reserve reversing course and nudging interest rates up again, therefore stymying the incentives meant to “stimulate” aggregate demand and supply in the present.
However, as the “Austrian” economists, notably Ludwig von Mises and Friedrich A. Hayek, argued, the real problems caused by Federal Reserve monetary and interest-rate policy are all beneath the macroeconomic aggregate surface. By manipulating interest rates, the Fed authorities modify a crucial market price, the price of allocating scarce resources between their competing uses in the present versus the future. It results in an attempt by borrowers trying to undertake time-consuming investment projects for which the real savings are not available to complete or operate profitably in the future.
In other words, what matters is not just investment or employment in general but what people are investing, employing, and producing for. Prices, as Hayek highlighted, are a communications device in a world in which people are separated from each other by time and space. Without the ability or the need to more directly know each other and what we all might be interested in buying and selling, market prices convey the minimal amount of information to inform people on both sides of the market what is or can be available, giving consumers and producers a means of keeping in touch and adapting to the changing circumstances on both the demand and supply sides of the market.
Distortion of what prices can and should be telling us bring about consumption and production patterns and relationships that are thrown out of balance, with misallocations of scarce means of production resulting in mismatches between supplies and demands. The use of interest rates as the intertemporal prices linking the demand for and the use of land, labor, resources, and capital can, likewise, be thrown out of balance, with an apparent investment “boom” bringing about too many of those scarce means of production being directed into longer-term investment projects inconsistent with their competing uses in more immediate consumer demand–related productions.
The effort to use scarce resources to increase longer-term investment without the required savings to sustain it, therefore competing with shorter-term consumer demands for those resources, shows itself in the rising prices brought about by the increased quantities of money created by the Federal Reserve. The generally rising prices that draw so much attention are the outcome of the monetary increases ending up in people’s hands over time, and as they spend money for particular purposes, they bid up the price of this good or that good, this or that service, this or that demand for resources and labor to satisfy these competing demands for them.
Macro manipulations and micro imbalances
People, pundits, and government policymakers then focus on the slowdown or downturn in general economic activity when, responding to the unwanted rise in general price inflation, the Federal Reserve starts nudging interest rates up to “cool down” an “overheating” economy. The recession that normally follows an inflationary investment period is the inescapable consequence of the microeconomic processes that were misdirected by false interest-rate signals during the macroeconomic “expansionary” period. As a result, the economy requires relative production, employment, and supply changes to rebalance various sectors of the market for a healthier and more properly recoordinated network of prices, wages, and patterns of supplies and demands.
Macroeconomic “full employment” depends on the right relationships and patterns among the microeconomic supplies and demands throughout the market. The macroeconomic monetary and interest-rate policy “tools” the Fed applies, however, simply prevent the price system and market incentives from properly working to assure the outputs and employments the Federal Reserve governors are so determined to manage.
When either the president of the United States or members of the Board of Governors of the Federal Reserve insist that they know where interest rates should be to influence those macro-aggregates of production and employment, they are presuming to have the knowledge and ability to effectively play the role of monetary central planner. None of them do. What interest rates should be, just like what the price of a can of corn or a loaf of bread or a suit of clothes should be, is not known to any one person or group of people, no matter how wise and omniscient they may consider themselves to be.
Separating money and banking from the state
Only “the market” knows what these prices should be, which means all of us together sharing what we know, what we want, and what we think we are willing to do given the scarce means to do so. The interactions of all these people generate the market structure of relative prices and wages, among which are interest rates for the coordination of savings and investment. To the extent to which America’s monetary central planners in the Federal Reserve co-opt the market process by manipulating interest rates, a critical market steering mechanism is prevented from properly working and helping to bring order among the multitude of market participants making their spending, saving, and investment decisions. It is no wonder that inflationary booms are followed by recessionary downturns. If prices,
including interest rates, are manipulated into sending out false signals, things are going to go wrong.
So, what is to be done? It is not simply a matter of Federal Reserve “independence,” or keeping “politics” out of sober-minded monetary policy decision-making, or even trying to set an automatic “monetary rule” over the management of the monetary supply, whatever the rule and the target for the rule might be. The only answer is getting government and its agencies like the Federal Reserve completely out of the banking, monetary, and interest-rate-setting business.
In other words, the needed policy reforms entail a separation of money from the state and the privatization of the monetary process, with a competitive free-banking system outside of political control. The market, which again means all of us, should determine what kind of money we wish to use; market demand, supply, and profitability should determine how much money is in use; and market competition in the financial markets should set rates of interest to reflect the wishes of savers and borrowers to come together for their mutual gains from trade.
Historically, commodities like gold and silver were the ones that were most frequently used as a medium of exchange — the money of the market. In a world freed from the heavy hand of government always trying to protect its declared legal monopoly over money, perhaps gold and silver might again reassert their monetary role in the transactions of the marketplace. Only a free market in money and the financial intermediary institutions that would best serve the uses that people may have for them can determine these things.
We need to abolish the Federal Reserve System and end monetary central planning. We need to separate money and the state.
This article was originally published in the December 2025 issue of Future of Freedom.
