### Key takeaways
President Donald Trump and newly confirmed Federal Reserve Chair Kevin Warsh have both publicly advocated for interest rate cuts, even though the U.S. economy is at full employment and inflation is hovering near the Fed’s 2 percent target.
The president’s push for lower rates is either at odds with established economic theories or lacks empirical support. One perspective is that his stance reflects a desire to exert greater influence over the historically independent Federal Reserve.
What this means for growth: Modern macroeconomic theory and empirical evidence indicate a trade-off between inflation and economic output: heightened economic activity boosts demand for goods and services, which drives up prices. Over the long term, however, inflation does not increase output; instead, the economy experiences higher prices without a corresponding rise in real economic activity. Furthermore, historical data shows that political pressure on the Fed from the executive branch tends to increase inflation without providing any boost to economic growth.
Overview
Since returning to the White House in early 2025, President Donald Trump has frequently called for lower interest rates and has harshly criticized the cautious monetary policy approach taken by former Federal Reserve Board Chair Jerome Powell. These criticisms led to the nomination of former Fed governor Kevin Warsh to succeed Powell, with the president explicitly tying his choice to Warsh’s public support for lower interest rates.
Both the president and Warsh have cited specific economic theories to justify their preferred interest rate policies. President Trump has repeatedly claimed that lower rates will drive higher economic output, resulting in “growth without inflation,” and that there is no significant trade-off between easier monetary policy and inflation. He offers two primary arguments for this: First, he suggests that demand-driven growth can combat inflation by expanding output. Second, he contends that his supply-side policies, such as high tariffs and the deregulation of fossil fuels, will keep inflation in check.
Warsh, meanwhile, argues that even with the economy at full employment and inflation above the 2 percent target, lower interest rates will not trigger higher inflation because of the rapid acceleration of AI technology. In Warsh’s view, advancements in AI will significantly boost economic output through increased productivity, providing the Fed with the room to cut rates aggressively without reigniting inflation.
This issue brief evaluates these economic arguments against standard macroeconomic theory and available data. To preview the findings, these claims by President Trump and Warsh are either inconsistent with standard theory or lack factual support. A more cynical interpretation is that the president’s demands are politically motivated and that Warsh’s nomination is intended to expand presidential control over the Federal Reserve.
This represents dangerous economic territory. President Trump’s efforts to undermine the independence of the Federal Reserve contradict a wealth of evidence regarding the benefits of central bank independence for economic stability, as well as the significant costs—in terms of both inflation and output—associated with past instances of political interference in monetary policy.
We begin this brief by examining President Trump’s economic reasoning.
The trade-off between inflation and economic output
President Trump’s remarks suggest he does not believe in a trade-off between inflation and economic output. Conversely, modern macroeconomic theory, supported by empirical data, places this trade-off at the center of the aggregate supply relationship, where high levels of economic activity that approach or exceed the capacity to supply goods and services eventually increase the demand for labor, oil, and other inputs, thereby driving up prices.
The inverse relationship between inflation and unemployment is known as the Phillips curve. Extensive economic research has confirmed the existence of this trade-off, even if its exact magnitude varies over time. Recent literature suggests the slope of this curve is particularly steep when unemployment is low, meaning that additional demand is more likely to result in inflation when the labor market is already tight.
This relationship helps explain the post-COVID-19 inflation surge in 2020. Tight labor markets, combined with supply shocks from the war in Ukraine and other disruptions, pushed inflation toward double digits in 2021–2022. Today, the April 2026 jobs report shows the U.S. unemployment rate at 4.3 percent, aligning with Federal Reserve projections for the long-run rate, which suggests that the inflationary risks of increased demand are high. In this climate, aggressive rate cuts could trigger a return of higher inflation.
The inflationary impact of lower interest rates also depends on whether consumer and business optimism, recent reports show inflation remains above the Fed’s 2 percent target. The April 2026 Consumer Price Index report indicated 3.8 percent year-over-year inflation, and the March Personal Consumption Expenditures report showed 3.5 percent inflation. As of May 2026, there is no data supporting the existence of a supply-side economic expansion.
Artificial intelligence to the rescue?
New Fed Chair Kevin Warsh has proposed a different supply-side theory for lower interest rates, focusing on the acceleration of artificial intelligence, which he describes as “the most productivity enhancing wave of our lifetimes—past, present and future.” Warsh argues that AI development will rapidly increase output, enabling the Fed to cut rates aggressively without reigniting inflation.
This reasoning contains a grain of truth: if AI-driven productivity gains materialize, inflationary pressure will indeed decrease. However, that conclusion is premature. General-purpose technologies often require years or decades to fully permeate the economy.
So far, aggregate productivity data do not show a significant departure from recent trends. To paraphrase the late Nobel laureate Robert Solow’s remarks on computer technology, the effects of AI are everywhere except in the data. According to the latest U.S. Bureau of Labor Statistics figures, year-on-year total factor productivity growth was just 0.8 percent, while labor productivity growth was 2.5 percent. There is no evidence of a productivity explosion that would justify lower interest rates.
Central bank independence
President Trump’s theories conflict with standard economic principles, yet they align with a historical pattern of presidential pressure on the Federal Reserve to lower interest rates at the cost of long-term stability. This issue of political interference led to the creation of independent central banks, which operate outside the direct control of the executive or legislative branches. Independence provides central banks with the distance needed to conduct monetary policy without direct interference from elected officials, who set the objectives but should not dictate the operational conduct of policy.
Historically, central bank independence has often been challenged. Presidents frequently prefer lower interest rates and pressure Fed chairs to meet their political goals. Notable violations of Fed independence include President Richard Nixon’s pressure on Chair Arthur Burns and President Lyndon B. Johnson’s pressure on Chair William McChesney Martin. Empirical evidence shows that such political pressure increases inflation without providing any benefit to economic growth.
President Trump has repeatedly violated the principle of Fed independence by publicly demanding lower interest rates and initiating politically motivated investigations into Powell and Fed governor Lisa Cook. These actions threaten to further erode the Federal Reserve’s credibility, with harmful consequences for long-term inflation and growth.
Conclusion
Current deregulatory policies under the second Trump administration are not increasing the supply of basic economic inputs. Tariffs are not driving a supply-side expansion. And while AI holds the potential to spark a new wave of growth, it has not yet resulted in significant productivity gains.
Meanwhile, inflation remains elevated, partly due to the very policies intended to lower it—such as tariffs—and to other significant policy choices, including military action against Iran, which has driven up global energy prices and the cost of fossil-fuel-based inputs like fertilizer.
Lower interest rates are politically popular because they can provide a temporary economic boost. History shows that the incumbent party’s electoral prospects improve when the economy is strong. Yet, history also demonstrates that loose monetary policy, when not anchored to underlying economic conditions, can have severe, long-term negative effects, stunting growth and fueling persistent inflation.
Such a wave of stagflation would impose real costs on workers and families, increasing the cost of living while reducing job availability and depressing wages. It was this reality that motivated the United States and other developed nations to establish independent central banks and insulate monetary policy from political influence.
President Trump and his new Fed Chair, Warsh, should heed these warnings.
