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Recently, Federal Reserve Bank chairman Jerome Powell has been under fire from the 47th POTUS for not taking more aggressive action with interest rates. The valid concern for the U.S. Department of the Treasury are the trillions in refinancing this year, lower rates equal lower refinance costs. But what interest rate is the Fed impacting?

The Treasury and POTUS want the Fed to lower the Federal Funds rate. This is the rate at which banks borrow from each other. Banks are flush with reserves at the Fed that pay interest so the Federal Funds rate may no longer serve its intended purpose.

In my books, Escaping Oz: Navigating the Crisis and Escaping Oz: An Observer's Reflections, I labeled the Fed as the Supreme Wizard. Their participation in the credit and equity markets creates massive distortions.  Investors rely on the market to provide signals via the pricing mechanism.  Those signals have been gravely distorted by central banks that swoop in and make purchases with money created out of thin air.  The credit markets are valued much higher than they would be otherwise.  This creates a moral hazard since investors of all stripes expect the punch bowl to be continually filled. 

But their actions are no panacea. Remember in the Wizard of Oz when Toto pulled back the curtain revealing the Wizard as an ordinary man? Contrary to the belief of many, the Fed has no extraordinary powers and cannot sprinkle magic dust on the economy. Moreover, the Fed follows short-term interest rates, it does not lead them. For example:

I labeled the Fed as the Supreme Wizard. Remember in the Wizard of Oz when Toto pulled back the curtain revealing the Wizard as an ordinary man? Contrary to the belief of many, the Fed has no extraordinary powers and cannot sprinkle magic dust on the economy. Moreover, the Fed follows short-term interest rates, it does not lead them.

For example:

For the entirety of 2025, these short-term rates are essentially unchanged. In 2024, when the Fed began to lower the rate in August, the 13-week rate had already been in decline for one month.

We can make a separate argument about whether the Fed should set any rate whatsoever. The POTUS can continue to berate the Fed chairman, but until the market speaks, the Fed will take no action this week.

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