The Fed Has Seen This Movie Before

The Sugar Rush economy

Author

J.L. Bernstein
November 30, 2025

Happy Sunday,

All year, Trump has been pressuring Powell to cut rates faster. Powell has pushed back, insisting Fed independence matters for sound monetary policy.

Neither side has backed down. We're at a boiling point.

But this isn't new. The last time a president leaned on the Fed this hard, it didn't end well.

Most of it happened before I was born. But the older I get, the more I appreciate history…not just for the beautiful stories, but because it's one of the best tools we have for understanding what's happening right now.

Let's dig in…

The last time a president pressured the Fed chair to cut rates faster, we got the stagflation of the 1970s.

That president was Nixon. The Fed chair was Arthur Burns. Nixon worked through direct personal meetings…160 of them over five years, later documented through White House tapes. Trump works through public attacks, relentless and hostile. ("Too Late Powell" is just the latest.) The mechanism differs, but the academic research says the economic outcome is the same.

Markets are whipsawing on the Fed's direction. Powell cut 25 basis points in October but warned December wasn't a "foregone conclusion." Cut odds collapsed, then surged back after NY Fed's John Williams hinted rates may fall "in the near term." The committee itself is fractured—two members dissented in opposite directions at the last meeting, with Miran pushing for a larger cut and Schmid voting for no change at all.

Three days after Powell's hawkish October comments, rate cut expectations pulled back across the curve.

But here's what the market might be missing: the Fed has a long history of caving to political pressure. And the data suggests that pressure could push rates well below where macro fundamentals alone would take them.

What History Actually Shows

Thomas Drechsel at the University of Maryland compiled data on every personal interaction between U.S. presidents and Fed officials from 1933 to 2016—over 800 meetings, pulled from presidential archives. The pattern is consistent: direct pressure from the White House shifts monetary policy toward faster, deeper cuts than economic conditions warrant.

Drechsel's model: rates drop sharply, GDP spikes briefly, then both flatten. The stimulus doesn't stick.

Trump's public attacks differ in form from Nixon's private arm-twisting, but the underlying dynamic is the same. Applying Drechsel's framework, if the current pressure is roughly comparable to Nixon on Burns in late 1971—and you could argue Trump's sustained public campaign is actually more intense—that implies significantly more easing over the next year than macro conditions alone would justify.

That could put the fed funds rate well below 3% by end of 2026. And once Powell's term expires in May and Trump appoints the next chair? The willingness to accommodate only increases.

The Sugar Rush Problem

The short-term picture looks fine. Historically, politically-motivated rate cuts do boost real GDP growth for one to two years.

Then it falls apart.

Drechsel's data shows no persistent increase in real economic activity from these cuts. You get a sugar rush that disappears once the easing stops. But you know what does persist? Inflation.

Here's why: aggressive cuts that aren't justified by fundamentals overheat the economy. Worse, when markets start doubting Fed independence, inflation expectations don't just drift around they normally jsut jump. Drechsel found political pressure shocks have a stronger effect on expectations than standard monetary policy shocks. That creates a feedback loop that's brutally hard to break.

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Cutting rates when inflation is running at 3% and GDP growth at 3.8% annualized isn't stimulus. It's gas on a fire that's already burning.

What all this (could) mean

The bear case writes itself from here: Powell eventually caves, whether from political exhaustion or because Trump's next Fed chair is a true believer. Rates fall faster than justified. Growth spikes. Markets celebrate. Then inflation embeds, expectations unanchor, and the Fed has to engineer a far more painful correction than if they'd just held the line.

That's the 1970s playbook. The research says it still works the same way.

If you're positioning for 2026 and beyond, the trade isn't "will the Fed cut" it's what happens when the sugar rush wears off….

Stay Curious,

- John