October 30, 2025

We identify a number of relationships that allow us to make inferences about the changes in monetary and credit policy needed to meet the Fed dual mandate. We show that in order to meet these two policy objectives , the Fed also needs two independent policy drivers that help us make inferences about the market clearing conditions of the money and bank credit markets, the inflation rate and T-bill yields are our outlook key drivers. Both President Trump and Jerome Powell agree that a 2% inflation rate is desirable , they have a difference of opinion regarding the path of interest rates. When all is said and done , the process outlined here results in a lower M2, higher bank credit, lower inflation rate, and lower interest rates. Not a bad economic environment and in line with President Trump’s expectations. Yet not every Trump wish will materialize. The stronger growth and lower inflation rate tend to have opposite effects on the nominal GDP growth rate. Hence it is inconclusive whether the nominal GDP will rise , even if the real GDP does. Given the close relationship between the long bond yields and the nominal GDP growth , we cannot ascertain whether the long bond yields will also decline. The logic of the previously outlined policy mix leading to the Trump desired outcome is impeccable yet Mr. Powell does not fully agree with it. The main source of the disagreement being that he adds an additional piece of information to his analysis. He clearly believes in the existence of an output-inflation tradeoff. Simply put, he is a Phillips Curve devotee. As a result . the Powell response results in a slower decline in the inflation rate, higher interest rates , and slower real GDP growth. An outcome less desirable that what the policies proposed by President Trump or that produced by the Volker operating procedures , while in principle the differences of opinion are a welcome in a policy debate. Whether the driving force behind the Fed’s actions are the Powell economic views or political leanings is an irrelevant issue, at some point the debate has to be resolved and the data suggests that Mr. Powell has been dead wrong. We need a new Fed chair that will take us back to the Volker Price rule

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