Tatyana Kulikova, economist

September 23, 2025, 12:09 AM

Last week, the US Federal Reserve cut its key interest rate after a nine-month pause and significantly revised its forecast for its future trajectory toward greater easing. Against a backdrop of accelerating inflation and low unemployment, this effectively signifies the Fed’s capitulation to pressure from President Trump, dealing a severe blow to the US dollar’s status as the world’s primary reserve currency.

To begin, let’s recall some facts about the structure and specifics of the American equivalent of a central bank—the Federal Reserve System (FRS). Without this background, it would be difficult to explain the significance of what happened at this organization’s September meeting.

The Fed, unlike most global central banks, officially has a dual mandate: inflation and the labor market. The first mandate means maintaining inflation (or more precisely, the sustainable portion of the consumer spending index, or Core PCE) near the 2% target.

The second part is maintaining so-called maximum employment, defined as the highest possible level of employment without accelerating inflation. There are no clear numerical criteria for maximum employment, but employment is generally considered to be at its maximum when unemployment is at its so-called natural rate. Currently, for the United States, this is estimated at 4.1% (zero unemployment is fundamentally impossible in a capitalist economy).

Let us emphasize that, contrary to popular belief, maintaining economic growth is not part of the Fed’s mandate. Of course, the Fed tries to prevent recessions, since unemployment always rises during a recession. However, if inflation accelerates significantly, even a man-made recession is considered acceptable to curb it (this is a lesson learned from the bitter experience of the “Great Inflation” of the 1970s). Generally, when making decisions, the Fed emphasizes the portion of its dual mandate that is currently most off target.

The Federal Reserve’s primary monetary policy tool is the “target range for the federal funds rate,” which is always 0.25 percentage points (pp); for brevity, we will refer to the upper limit of this range, which we will, again for brevity, call the key rate.

Beyond its dual mandate, another key distinction between the Fed and the vast majority of global central banks is its distributed structure: it is a system of regional reserve banks, not a single monolithic organization. This means, among other things, that the members of the committee that makes decisions on the key interest rate enjoy greater autonomy than at other central banks. Even in their public statements, they do not always adhere to a single line and are free to express opinions that deviate from the committee consensus. The Fed chairman, of course, wields significant clout within the organization, but in decision-making, they formally simply have one vote—equal to the other committee members.

The relative independence of the interest rate committee members also results in the specific format of the key rate forecast used in the Fed’s official documents. The Fed presents this forecast in the form of a scatter plot (colloquially known as a dot plot), in which individual dots represent each committee member’s forecast for the rate level they expect at the end of the current year and the next two years.

As we recall, to combat the post-COVID inflation surge, the Federal Reserve conducted a cycle of monetary policy tightening, and in July 2023, the key rate peaked at 5.5%. For the US, with its enormous public debt and massive business indebtedness, this is a significant figure. As a result, by the summer of 2024, inflation had declined significantly, but still fell short of the 2% target, stagnating at around 2.5–2.7%.

Nevertheless, in September 2024, the Fed cut its rate, and sharply—by 0.5 percentage points, that is, by two standard increments—even though there was no apparent reason for such haste (see “Fed Panic,” Pravda, No. 104, September 24, 2024). And subsequently, we learned nothing that would explain such a sharp rate cut. Many, including then-presidential candidate Donald Trump, speculated after the cut that it was made for political reasons—to help the incumbent candidate, Kamala Harris, win the presidential election. Trump criticized the Fed at the time and accused its chair, Jerome Powell, of political bias.

However, upon taking office, Trump himself began demanding that the Fed sharply cut its key interest rate—to 1%. But the Fed did the opposite: after two more rate cuts by the standard 0.25 percentage point increment in November and December 2024, the rate cut cycle was suspended upon Trump’s arrival in office (the rate remained at 4.5%). The reason is clear: the import tariffs promised and then implemented by Trump are a powerful inflationary factor, to which the Fed was forced to respond.

This marked the beginning of the epic standoff between President Trump and Fed Chairman Powell, which we previously discussed in our recent article, “Perestroika, American Style” (Pravda, No. 70, July 4, 2025). Trump began with verbal attacks on Powell. He derisively nicknamed the Fed Chairman “Mr. Too Late” (a reference to his delay in cutting rates), and even publicly called him a “stupid person.” This behavior from the head of the executive branch is completely unprecedented not only for the United States, but perhaps for any country in the world.

While the attacks were limited to verbal ones, Powell still held his own. In his public appearances, he calmly spoke of the impossibility of lowering rates due to heightened macroeconomic uncertainty, hinting at a looming inflation surge due to trade tariffs. At the Fed meeting in late July, the rate was kept at 4.5%.

However, Trump isn’t giving up on his plans so easily. So, from verbal attacks, the American president has shifted to more forceful methods of pressure: an investigation has been launched against Powell for embezzlement of funds during the construction of the new Federal Reserve building.

Apparently, this was where Powell broke down: in his keynote speech at the Federal Reserve’s annual symposium in Jackson Hole, he hinted that the key interest rate could be cut as early as the September meeting. To explain this reversal, Powell cited new negative labor market data (as we recall, this is the second part of the Fed’s mandate).

In fact, there was nothing particularly negative in the labor market data. Yes, unemployment rose to 4.3% in August, having remained at 4.1-4.2% since the summer of 2024. But 4.3% in August is still very low by historical standards: it’s only slightly above the “natural rate,” which, as we discussed above, is currently estimated at 4.1% in the US. Yes, the number of new jobs fell slightly, but the labor force also shrank due to the decline in immigration.

Overall, the US labor market is doing relatively well, but inflation is quite poor. Annual inflation, as measured by the Core PCE consumer spending index, continues to fluctuate between 2.6% and 2.9%. Moreover, it has been steadily rising since May, and by the end of July (the latest available data), it had again approached the upper limit of that range: 2.9%. This means it’s almost 50% higher than the target. And what’s to come when the full impact of import tariffs reaches the end consumer?

Under these circumstances, a rate cut seems rather odd, which is why we think Powell caved in to Trump’s pressure. But that’s not so important, as Powell’s term ends next spring, so the Fed chair will soon be chosen by the president and willing to cater to his every whim. This isn’t a disaster for the US, however, because if the other members of the interest rate committee adhere to a prudent policy, even such a Fed chair alone won’t be able to counter their consolidated position.

Far more important is what we saw following the September meeting. The Fed, as expected, cut its rate (by 0.25 percentage points to 4.24%). What’s surprising isn’t the cut itself, but rather the fact that not a single vote was in favor of keeping the rate unchanged, and the post-meeting statement was much more dovish than at previous meetings.

Moreover, committee members’ forecasts for the rate level at the end of this year (and next) have shifted significantly toward further easing. The median forecast for the end of this year is now 3.6% (meaning the median committee member expects two more rate cuts before the end of the year), compared to 3.9% at the previous two baseline meetings (in June and March).

Thus, not only did Powell succumb to the president’s pressure, but all the voting members of the committee began to behave much more accommodatingly. The Fed chairman, unlike the others, retained a vestige of independence: at the press conference, he tried to shift the emphasis slightly toward a hawkish stance, even though he had voted for a rate cut at the meeting.

How did Trump manage to secure such obedience? To answer this question, it’s enough to recall two recent events involving members of the Federal Reserve’s Rate Committee. First, shortly before the Fed meeting, Trump accused one of them, Lisa Cook, of mortgage fraud and demanded her resignation. So far, nothing has come of it, but the American president is not backing down: he recently filed a request to the Supreme Court to this effect.

Secondly, a little earlier, in August, another member of the wagering committee, Adriana Kugler, resigned – voluntarily, but suddenly and without explanation. The situation with Lisa Cook suggests that Kugler’s resignation may also have been under duress. Apparently, the other committee members, seeing all this, decided not to push their luck.

So, based on the results of the September Fed meeting, we can conclude that Trump has almost completely taken over the institution. The Fed’s independence has been lost, at least for as long as Trump is in office. And for a capitalist economy like the United States, an independent central bank is a prerequisite; without it, inflation will inevitably accelerate, as the Turkish case clearly demonstrated. The United States, of course, won’t reach a Turkish scenario, but they are moving in that direction.

This is very bad news for the reserve status of the American dollar…

Comments by me:

and it is very good news to the world