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By Michael J. Hicks
September 28, 2025

Federal Reserve’s 0.25% interest rate cut, announced Sept. 17, will have little economic effect by itself. The most important aspect of the move is what it tells us about tariffs and the damage MAGA policies are having on the U.S. economy.

The Fed has a dual mandate to keep inflation and unemployment low. It cuts rates when the U.S. economy is slowing and labor markets show significant strain. Those things are happening now.

MAGA policies are affecting both the demand for, and supply of, labor.

Immigration into the U.S. has stopped and, with it, the largest source of employment growth. Higher prices on manufactured goods—particularly intermediate goods that go into the assembly of cars, consumer electronics, manufacturing equipment and other products—have already shaved 72,000 factory jobs this year. We should expect tens of thousands, if not hundreds of thousands, of more factory job losses in the coming months.

The Fed can affect only the demand side, and that capacity is weakening.

First, some of the demand for new goods and services comes from immigrants. Ending immigration will reduce economic growth in ways that are immune to the Fed’s monetary policy.

Second, tariffs make many products—homes, cars and business equipment—more expensive in ways that quickly spill over into services, like auto and home insurance and even Uber rides.

Finally, the growing budget deficit means market interest rates for cars, homes and other consumer goods will be less affected by Fed decisions.

The economic jargon for this last effect is the “transmission mechanism” for monetary policy. In a world of high federal deficits and debt, lenders price in expectations of higher inflation risk. Indeed, mortgage rates actually rose slightly after the Fed cut rates. This is the opposite of MAGA policy hopes, yet it is consistent with lenders fearing future inflation combined with slower growth.

MAGA policies will keep mortgages and consumer loan rates high—a sad fact we seem destined to live with for years.

The Fed cannot stimulate demand from families who aren’t here, and it cannot reduce the effect of tariffs on prices by changing monetary policy. So, however hard the Fed tries, its efforts to prevent a deepening economic downturn over the coming year will be muted.

Fed rate cuts will have only modest effects on growth, or none at all. But that might not even be the prime risk. The real challenge is that inflation remains too high.

Tariffs have caused prices to rise as businesses transfer the costs to consumers. So far in 2025, the tariff cost has been roughly $900 per American. But, as I’ve written before, that isn’t technically inflation because it doesn’t affect salaries and wages—just prices.

The higher tariff prices will be a one-time price bump that reduces purchasing power of the average American by $1,400 each year, for as long as the tariffs are in place. But they don’t keep rising every year. If all the price increases we see are from tariffs, then the Fed is especially justified in cutting rates.

However, even without tariffs, getting inflation down to the Fed’s 2% target has proved difficult, requiring significant increases in interest rates.

That may be because businesses and households have begun to anticipate inflation. Businesses keep raising prices, and workers demand higher wages (or change jobs) in response.

Once this trend is unleashed, it will almost certainly take a deep recession to cleanse the economy of inflationary pressures. That is scary for anyone old enough to remember the 1970s or the 1981-82 downturn.

Another problem is the federal budget. The Big Beautiful Bill was the most inflationary piece of legislation in American history, adding more debt than the two COVID-era stimulus bills combined. This should trouble folks who remember a period of inflation that was really bad. I don’t mean 2022-2024, which was a tepid bout of inflation by historical standards.

So, what Federal Reserve Chairman Jerome Powell said this week, and what the voting members revealed in their forecasts, is that the economy is slowing while inflation is far from under control. Financial markets for long-term borrowing of bonds and mortgages responded with deep concerns.

The fundamental worry is a slow-growing economy burdened by rising prices—or what economists call stagflation. The comments by Powell and the forecasts of the different Fed member banks all point towards that toxic mix of higher prices and slower economic growth.

The irony here is that it was stagflation in the 1970s that killed old-fashioned Keynesianism as a viable economic theory. Economic conservatives have been bashing Keynesian policies ever since.

The MAGA economic policies that are resurrecting stagflation are right out of the old-school Keynesianism of the ’60s and ’70s. High spending that results in historically large deficits, combined with higher taxes (tariffs) and a total disregard for an independent monetary policy, is making us look like Italy or Greece in the early 1970s.

MAGA economic policies have always been inconsistent and subject to the whims of the president. They have been framed in terms of fiscal probity and conservatism.

But, words alone do not make an economic policy. In its policies and actions, the huge deficits, the regressive import taxes and the rejection of monetary policy, MAGA is closer to old-school Keynesian policies than anything the U.S. has tried in half a century.

That one ended badly, whipping us back and forth between political majorities, while the economy slumped, prices rose and Americans grew furious. This time will end badly as well. The only questions are how bad, and how soon?

Michael J. Hicks is professor of economics and the director of the Center for Business and Economic Research at Ball State University. He previously served on the faculty of the Air Force Institute of Technology’s Graduate School of Engineering and Management and at research centers at Marshall University and the University of Tennessee. His research interest is in state and local public finance and the effect of public policy on the location, composition, and size of economic activity. 

The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body. Also, the views and opinions expressed do not necessarily reflect the views of The Indiana Citizen or any other affiliated organization.