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September 25, 2025

How Low Can Interest Rates Go?

When the Fed voted on September 17 to cut short-term interest rates by a quarter point, there was a lone dissenter. It was Trump appointee Stephen Miran, who was sworn in as Fed Governor just one day earlier.

Miran wanted a steeper cut and argued for a half point. The other 11 voting members of the Federal Open Market Committee (FOMC)—which consists of seven Fed Governors and five Federal Reserve Bank Presidents—all went for the more gradual approach.

Miran remains an outlier at this point—but Trump will soon name a replacement for Jerome Powell, whose chairmanship ends in May 2026.

It is reasonable to think the new Fed Chair will be philosophically aligned with Miran. It could even be Miran himself.

Yesterday, Treasury Secretary Scott Bessent reinforced Miran’s message. He slammed the Fed for its slow approach.

Rates are too restrictive, they need to come down. I’m a bit surprised that the chair hasn’t signaled that we have a destination before the end of the year of at least 100 to 150 basis points. - Treasury Secretary Scott Bessent (9/24/2025)

In this report, we take a close look at the credible arguments—too often dismissed or overlooked by mainstream commentators—that support the Trump administration’s position that interest rates are now far too high.

We then discuss the implications for investors of what may soon turn out to be a major regime change at the Fed.  

Trump vs. the Fed

Stephen Miran’s path to the Fed is one of many controversies surrounding the Trump administration’s interactions with the central bank.

As one of Trump’s top economists, Miran has served as Chair of the Council of Economic Advisers (CEA), a position he took on in mid-March.

For those unfamiliar with Miran, a Harvard Ph.D. who until quite recently was a relatively obscure figure, even in economic circles, we profiled him last December (Trump’s Top Economist Breaks with Convention).

When a Biden appointee named Adriana Kugler recently stepped down as Fed Governor, Trump seized the opportunity to put Miran in her seat. The Senate just confirmed Miran on September 15.

Miran has not actually left the CEA, a critically important executive agency that advises the President on economic matters. He is on unpaid leave, while council member Pierre Yared takes over as Acting Chair.

During the confirmation hearing, several Senators questioned this unusual arrangement. Even though Miran will no longer receive emails or have actual duties on the council, the concern is that he still has one foot in the door of the White House, while also playing a key role at the Fed.  

“New blood”

The Trump administration clearly intends to reshape the Federal Reserve. The effort to find a replacement for Powell is being coordinated by Scott Bessent, who previously declined interest in the role.

Bessent faults the Fed for being mired in old ways of thinking and overly reliant on stale data. Yesterday, he talked about the need for “new blood” at the Fed with a more flexible mindset.

Everyone asks me what am I looking for when I interview potential Federal Reserve chairs, and it's just someone with an open mind, who's not looking in the rearview mirror, who's looking forward. - Treasury Secretary Scott Bessent (9/24/2025)

The Trump economic team thinks differently on a wide range of economic subjects, especially when it comes to monetary policy. Trump himself has directly advocated for lower interest rates—harshly criticizing Jerome “Too Late” Powell for keeping rates too high.

Mainstream economists and bankers have tended to align with Powell, who has pointed to concerns about the potentially inflationary impact of tariffs among his reasons for keeping policy restrictive.

But with labor market conditions now getting weaker, and the jobs data Powell previously relied on getting revised downward, Powell has been moving in Trump’s direction.

Powell’s pivot on the interest rates, first signaled at Jackson Hole in August, led to the first Fed funds rate cut since Trump took office, which we discussed last week (The Fed Gives Trump His First Rate Cut).

The independence debate

The Trump team has pushed back on criticism that it should not be leaning so heavily on Fed officials. This criticism is based largely on the idea that monetary policy should be determined without executive branch interference.

Since the Federal Reserve System was created by Congress in 1913, Presidents from both political parties have repeatedly sought to influence Fed policy.

A turning point came during the administration of Harry Truman. Throughout World War II, the Fed, at the direction of the White House, basically kept interest rates at very low levels so the government could afford to make payments on all the war bonds it had issued.

The Fed wanted to raise rates after the war, in response to surging inflation. But President Truman and his Treasury Secretary John Snyder—a close friend of Truman’s who served with him in the Army Reserve during World War I—wanted rates to stay low to help sustain the post-war economy.

The upshot of the standoff was the Treasury-Fed Accord of 1951, an informal memorandum of understanding between the White House and the Fed that defined clearer boundaries between the two bodies of government.

The reason Fed independence is valued is that it is inherently dangerous to give elected politicians complete control of the printing press. They may abuse it to achieve short-term goals, like goosing the economy in order to win an election, at the expense of long-term currency stability.

History is littered with failed governments that debased their currencies to fund wars or appease the population—from the Roman Empire to Weimar Germany to Zimbabwe to Venezuela.

But is the Fed really independent?

The 1951 Accord may have created more distance between the Fed and the White House, but it does not have the force of law. The Fed is still not totally independent and never has been.

By law, the Fed’s Governors are nominated by the President and later confirmed by the Senate. The regional Federal Reserve Bank Presidents are in turn voted in by the Governors.

There are many processes, procedures and safeguards in place, but the President as chief executive ultimately decides the composition of the Fed’s leadership. Subject to Senate confirmation, he can name anyone he wants.

In the modern era, White House involvement with the Fed has tended to take place subtly and behind the scenes.

A notorious example was when Lyndon Johnson pressured William McChesney Martin to keep monetary policy loose to support the Vietnam War and his Great Society spending binge.

Appointed by Truman, Martin was the longest tenured Fed Chair ever. He served from 1951 to 1970 during one of the most impressive economic expansions in American history.

Martin, a St. Louis native who played a key role at the U.S. Treasury during World War II, famously quipped that the role of the Fed is to “take away the punch bowl just as the party gets going.”

LBJ was fond of the punch bowl, but so was Richard Nixon. In his secret diary, Fed Chair Arthur Burns claims Nixon pressured him to keep interest rates low heading into the 1972 election.

The ambiguities around Fed independence easily lead to accusations of political bias.

Take the Fed’s decision to cut interest rates 50 basis points in September 2024, just prior to the Presidential election. This was viewed by many as a move motivated by the desire to improve the economy for the benefit of the incumbent Democrats.

Opinions on Fed independence will vary, but it is hard to argue that Trump’s efforts to influence the Fed have been happening behind the scenes.

While conventional practice is to pay lip service to an autonomous Fed, Vice President JD Vance came right out and said that the democratically elected President should have more control.

Isn't it a little preposterous to say that the President of the United States… doesn't have the ability to make these determinations…. What they're effectively saying is that seven economists and lawyers should be able to make an incredibly critical decision for the American people with no democratic input. - Vice President JD Vance (8/28/2025)

The next Fed

As Trump gets the opportunity to replace Fed Governors, it seems clear that, while he will of course look for individuals who are experienced and qualified, he will choose people who agree with his perspective and can persuade others as well.

This likely means that the next Fed Chair, whether it is Stephen Miran or someone else, will have to be able to articulate a credible framework for lower interest rates under the current circumstances.

It is not enough just to say you want lower rates. If you are going to succeed, you have to make the case, especially if you want to shift consensus among remaining Fed officials who are not Trump appointees.

So what is the case for lower rates?

Speaking at the Economic Club of New York on Monday, Miran went into detail about why he voted the way he did.

It is possible that you missed his speech, which had the riveting title Nonmonetary Forces and Appropriate Monetary Policy. The good news is we are here, as always, to bring you the key points:

(1) Inflation is easing faster than people realize.

Housing, which makes up a large share of inflation measures, has been overstated because official rent data lag reality. With new leases now showing rent growth around 1%, Miran expects measured inflation to drift lower.

Miran argues that economists are missing the impact of Trump immigration reform, as the U.S. moves from approximately 1 million immigrants per year towards “net zero.”

With some 100 million renters in the United States, he estimates this will have a potential impact of 1% on rental inflation rates, which will help bring down overall inflation rates.

(2) The “neutral” interest rate has fallen.

The neutral rate is the interest rate at which the Fed’s dual objectives—full employment and price stability—are theoretically in balance.  

Miran argues that structural forces—including slower population growth (immigration reform), rising national savings from tax and trade shifts, and pro-supply policies in energy and regulation—all lower the rate at which money must be priced.

While tariffs are seen by many as inflationary, Miran notes that the Congressional Budget Office (CBO) anticipates that tariff revenue could reduce the federal budget deficit by nearly $400 billion per year over the next decade. He estimates that this factor alone reduces the neutral rate by half a percentage point.

(3) The economy’s productive capacity is expanding.

The Fed is not currently taking into account the positive impact of Trump policies on the potential output of the economy. If potential output is growing faster than actual output, keeping rates high risks undercutting job creation.

So how low can rates go?

The Fed just cut the Fed funds rate to a range of 4.00% to 4.25%. Miran believes an “appropriate fed funds rate” would be 2.00% to 2.50%.

The upshot is that monetary policy is well into restrictive territory. Leaving short-term interest rates roughly 2 percentage points too tight risks unnecessary layoffs and higher unemployment. - Fed Governor Stephen Miran (9/22/2025)

In general, Miran is making the case that the Fed is failing to take into account the very real decay in housing market conditions. As usual, the Fed is pegging its decision-making to backward-looking data rather than observable and predictable trends.

The Fed is also placing a lot of weight on the potential inflationary impacts of tariffs, as importers pass much of these costs onto consumers.

Yet the Fed is failing to take into account the positive impact of all the new tariff revenue, which on the margin means lower deficit spending, which is inherently disinflationary.

What about AI?

In a footnote to his speech, Miran noted that there are “other items that might affect productivity growth, like artificial intelligence,” but he chose to focus on other variables for purposes of this discussion.

AI is just now getting deployed across the economy, so it is early days in terms of the impact it could have on productivity. Miran relied on more immediate and observable productivity growth drivers, like deregulation, to make his case.

Investors should consider, however, as AI productivity gains accumulate in the years ahead, this will only reinforce Miran’s claims that interest rates should be much lower.

The AI revolution may just be getting started, but, in our view, it could over time become the most important variable in this whole discussion.

Impact on investors

The reason investors obsess over the Fed, parsing every word Jerome Powell utters, is that the level of interest rates and other monetary policy decisions do have a profound impact on asset prices.

In general, lower interest rates tend to lift almost all asset prices—stocks, bonds, real estate, gold and crypto.

When interest rates are lower, the economy can run hotter than it otherwise would—which translates into higher corporate earnings.

It also means more money chasing risk assets, like stocks, because of greater liquidity and relatively lower returns available in bank accounts and other low-risk fixed income investments.

The longer term risk with cutting interest rates is that you overdo it and create inflation. This is what the Fed, on Jerome Powell’s watch, arguably did in 2020 and 2021, in response to the pandemic.

Stocks and other assets surged from mid-2020 through the end of 2021, but later crashed in 2022, as the Fed had to start jacking up interest rates to get inflation under control.

In our view, the key question for investors is not so much what the Fed will do in the next 6 to 12 months, but whether or not Stephen Miran, Scott Bessent and Donald Trump are actually right.

Can the economy actually sustain lower interest rates and run hotter without causing too much upward pressure on inflation?

As Trump reshapes Fed leadership, we will likely get more decision-makers in place who believe the answer to that question is yes, which in and of itself should help bring interest rates down.

But the even more important variable is whether the economic data comes through supporting their assumptions.

The Fed under Powell is now slowly pivoting, not necessarily because of anything Trump has said but because rising unemployment and rising productivity growth support easier monetary policy.

If interest rates should be lower now than they are, this means we are needlessly driving too slow—doing 55 MPH in a 65 MPH zone, so to speak. We are performing economically below our potential.

When Trump names a new Fed Chair, whoever it is, this could be the key catalyst to change the consensus among Fed decision-makers.

What matters most of all, however, is that Trump’s economic policies do result in greater productivity. This will manifest itself as persistently lower rates of inflation that will allow the Fed to pursue easier monetary policy.

So while it may be frustrating in the meantime, long-term investors who appreciate the positive changes underway in the Trump economy have a lot to look forward to as interest rates ultimately come down.

Interest rate sensitive stocks, which includes many holdings within our Income Builder Model Portfolio, stand to benefit in particular. We plan to highlight these names in our monthly portfolio review next week.

The Fed may be too late, too backward-looking and too skeptical of Trump’s economic agenda—but will eventually have to respond to data. And in less than nine months, Trump’s pick for the next Fed Chair from will take office.

Trump has not shown a tendency historically to select bashful, wallflower types for key leadership positions. Whoever is chosen will almost certainly be a forceful advocate for lower rates.

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