The Federal Reserve had few good choices when it again cut interest rates.

On the basis of what was known about inflation and labor markets, it could have resisted White House pressure and justified a move in the opposite direction—raised interest rates—or stood pat.

Inflation is not abating—near 3%, it’s where it was last December.

During the years between the 2008 Global Financial Crisis and COVID, deflation in goods producing industries often offset inflationary pressures among service providers. But now both sides are raising prices.

President Trump’s first term tax cuts, President Biden’s industrial policies and COVID relief spending increased the federal deficit from 3.1% of GDP in 2016 to nearly 6.4% in 2024.

With the tax relief and net additional spending imposed by the Big Beautiful Bill, deficits well above 6% are likely over the next decade.

The buildout of Artificial Intelligence—investments to advance large language models, develop agents that direct robots and replace white collar workers, build data centers and expand electrical generating capacity—and accompanying stock market boom further boost aggregate demand and inflation.

Initially, businesses absorbed much of the additional costs imposed by Mr. Trump’s tariffs. But that couldn’t be sustained indefinitely, and those are now washing through the economy.

Ordinarily, these pressures should warrant the Fed raising interest rates to curb demand and decelerate inflation, but circumstances are hardly normal.

Readings from the jobs market signal both shortages of workers and too few opportunities.

We haven’t enough skilled tradesmen and STEM workers. Meanwhile, white-collar workers displaced by AI face seemingly endless searches for new positions.

Since April, the private sector has added about 48,000 jobs a month. That’s not dramatically less than what labor force growth could support given indigenous population growth and the president’s tougher immigration policies.

Against all this, Chairman Powell had to cobble together a consensus or at least a convincing majority among the 12 voting members of the Fed’s policymaking Open Market Committee.

A sizeable group appeared cautious about cutting interest rate further but a vocal group including candidates to replace Mr. Powell in May and White House economist on leave Stephen Miran supported Mr. Trump’s insatiable appetite for easy money.

The rate on 10-year treasuries at 4% is already less than the likely pace of nominal GDP growth—real growth at about 2.5% plus inflation at about 3%.

The Fed pulling down that rate should lower mortgage and business borrowing rates with housing and business investment being primary conduits of a looser monetary policy.

With so many restrictions on building apartments and land shortages for single family homes, we must ask how much difference that will make.

In the business sector, borrowing costs appear not to be an impediment to investment. Rather, it’s uncertainty about tariffs—the Supreme Court could strike down much of what Mr. Trump has imposed.

For AI, interest rates appear less relevant with the tech giants earning and pouring in so much cash and venture capital investors bidding up startup projects.

Fiscal policies to boost aggregate demand—for example, additional subsidies for Affordable Care Act health insurance or payments to taxpayers to offset the effects of tariffs on real household income—would have to be financed by printing money.

The Treasury would issue more debt, and the Fed would have to buy more treasury securities to sustain its interest rate target—it does that by running the printing press.

Fixing inflation and the jobs market requires structural changes beyond the Fed’s powers to effect and that appear too odious or heavy for politicians with hands on the relevant levers.

These include immigration reforms to obtain workers with needed skills, tough love and restraining for white collar workers displaced by AI and building code and land use reforms, especially around big cities.

For the remainder of Mr. Trump’s presidency, we can expect persistent White House pressure on the Fed to keep interest rates artificially low and nagging inflation.

In this environment, skilled tradesmen, AI talent and the chosen few in finance and others in services who enable them will be charmed cohorts.

Almost everyone else will struggle under the weight of unforgiving jobs markets and inflation.

With so much dynamism from AI and inflation, equity investors should be the most charmed group of all.

Persistent inflation at 3% shouldn’t be menacing to them.

For the 40 years prior to the 2018 Global Financial Crisis, inflation averaged 4.0%, the 10-year treasury yield averaged 7.4%, appreciation on existing homes was 5.6% and the S&P 500 return 10.5% a year.

Put your money in stocks until sanity returns.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.