The Federal Reserve Is Stuck Between a Rock and a Hard Place!

Trump Wants This One Specific Thing From Chairman Powell... Is It Smart?


Mike Maharrey Mike Maharrey
Midweek Memo
January 15th, 2025 Comments

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Federal Reserve Chairman Jerome Powell has indicated interest rates probably need to stay higher for longer. President Donald Trump says we need deeper rate cuts now.

Who is right?

Both!

And as Mike Maharrey explains in this episode of the Midweek memo, the difference of opinion between Trump and Powell underscores an ugly reality -- the Fed is stuck between a rock and a hard place. He also explains why this matters to gold and silver investors. 

Mike opens the show with a classic Catch-22.

"You need experience to get the job. You need the job to get experience.

"It’s a classic Catch-22. The term comes from Joseph Heller’s classic novel. It basically a paradoxical situation where an individual cannot avoid a problem because of contradictory constraints or rules. In the novel, pilots who were mentally unfit to fly could be grounded, but if they requested to be grounded to avoid dangerous missions, it demonstrated their sanity, making them fit to fly. Thus, they were trapped in an illogical loop.

"You know who is in a Catch-22?

"Powell & Company over at the Federal Reserve."

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Mike explains the dual mandates assigned to the Fed: maintaining price stability and maintaining maximum employment. 

"So, if you kind of put it together, the Fed is supposed to, as far as it depends on monetary policy, simultaneously keep the economy growing and keep price inflation under control."

This is the root of the Fed's problem. It's supposed to do two somewhat contradictory things.

"So, look at the situation today. The central bank needs to keep cutting interest rates because a debt-riddled economy addicted to easy money can’t function in a higher interest rate environment. On the other side of the coin, the Fed needs to keep interest rates higher to keep inflation at bay. I would even argue they need to crank them higher given the inflation situation."

The problem is clear. It can't do both. It can't simultaneously raise and lower interest rates.

Mike points out that the trajectory of the CPI is very similar to how it ran in the 1970s. Price inflation peaked in 1974, but then moderated after the Fed raised rates. So, the central bank declared victory and cut rates. By 1977, price inflation was peaking again.

"By January 1980, it was nearly 15 percent. That forced Paul Volker to actually go to war with inflation. He jacked rates all the way to 20 percent and finally laid the inflation dragon to rest. If you look at the CPI between 2022 and today, it tracks almost perfectly with the mid-1970s. CPI peaked and then fell off but never got back to the target. The most recent inflation data has shown it if not heating up, at least showing signs of stickiness. So here we are. The Fed is stuck between a rock and a hard place."

Mike points out some recent comments by Donald Trump that underscore this Catch-22.

"He hasn’t even been sworn into office yet, and he’s already locking horns with Federal Reserve Chairman Jerome Powell. During the December Fed meeting, Powell & Company indicated that the pace of interest rate cuts will need to move more slowly than initially thought. But Trump says we need lower rates now."

Mike goes on to examine these two conflicting points of view, starting with Powell's.

He points out that in practice, the Fed has been aggressive in cutting rates, but took a hawkish turn in December, projecting rate cuts wouldn't go as quickly as initially thought. 

Mike takes a little sidebar and explains the precise definition of inflation and why the popular definition causes a lot of confusion. Properly defined, inflation is an increase in the supply of money and credit. Rising prices are the result of this monetary inflation.

And the money supply is currently increasing. It has been since last summer. 

"So, even though Powell & Company would like to keep easing rates, they know that they have to tread softly in order to avoid another spike in price inflation. That’s their Catch-22."

Then there's Trump's point of view.

Last week, the incoming president emphatically declared that interest rates are too high.“We are inheriting a difficult situation from the outgoing administration, and they’re trying everything they can to make it more difficult. Inflation is continuing to rage, and interest rates are far too high," he said.

Trump’s affinity for low interest rates is understandable. After all, he is a real estate developer. He recognizes the stimulative value of low interest rates. However, even Trump has to acknowledge the dark side – inflation.

So, is Powell right?

Is Trump right?

The answer is yes.

And that tells you the Fed is between a rock and a hard place. 

"This debt-riddled bubble economy can’t keep limping along in this higher interest rate environment. This is precisely why the Fed delivered a rate cut in December while simultaneously jawboning about caution and trying to dampen expectations of more rate cuts in 2025. On the other hand, we have inflation."

Mike points out that the central bank engaged in loose monetary policy for well over a decade. It added nearly $9 trillion in new money to the economy between the Great Recession and the end of the pandemic in quantitative easing alone. 

"That monetary malfeasance has consequences. It created a massive debt bubble and all kinds of malinvestments in the economy. The impact hasn't manifested yet. When the economy visibly cracks, the Fed will be forced to get even more aggressive in loosening monetary policy - elevated inflation or not. If history is any indication, it will cut rates to zero again, and it will launch more rounds of QE. That means even more inflation. The worst-case scenario is a protracted period of stagflation."

Mike emphasizes that the Fed is stuck between a rock and a hard place. There is no easy way out. 

"This is important to remember if you’re a precious metals investor."

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Mike says, simply put, no matter how this plays out, you need gold. In fact, this is exactly why so many central banks are stocking up on the yellow metal. They recognize the risk inherent in the dollar.

"Here’s the thing – in the current environment, inflation is the flavor of the day. There either is still a lot of inflation in the economy devaluing your dollar. Or, the Fed is set to create more inflation – devaluing your dollar. No matter how you slice it, your dollar is devaluing. So, you probably want to have an inflation hedge – something to maintain your wealth as the dollar depreciates."

With that, Mike says now is the perfect time to call 800-800-1865 and talk to a Money Metals Precious Metals specialist.

Articles Mentioned in the Show

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Inflation Then and Now

Mike Maharrey

About the Author

Mike Maharrey

Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.