Thursday, December 18th, 2025
By Laura Kuntz, CPA/PFS, MBT, Chief Investment Officer
Interest Rate Politics
You may be aware that President Trump is a “yuge” fan of the Federal Reserve Board (FED) cutting interest rates to juice the economy, especially as things are slowing, in part due to tariffs. This is not the first time a president has tried to use interest rate to spur economic activity during their term in office.
President Nixon privately pressured FED Chair Arthur Burns to adopt lower interest rates. Burns’ FED did so, providing Nixon short-term economic growth, but also, unfortunately, sowing the seeds for hyper inflation (also aggravated by rising oil prices). Before Nixon’s intervention, inflation averaged 3-4%. After the rate cuts, inflation steadily climbed: to 6% in 1970; 11% in 1974; and peaked at 14% to 15% in 1979-1980.1 It took the Carter administration’s appointing Paul Volcker as FED Chair in 1979 — with a follow on appointment by Ronald Reagan in 19836 — to “break the back of inflation.” The Volker FED pushed interest rates to a painful 19%,2 causing two severe back-to-back recessions. Some call this the “Volker shock.”4
You can imagine Volker’s and the FED’s unpopularity as people lost jobs, and businesses and farms failed. (A client in their mid 70’s just mentioned to me that their first home – bought during this time – was at a 17% interest rate.) But by 1983, Volker’s FED had slayed the inflation dragon, with inflation dropping to 4% and two years later to 2%. At that point, the FED flipped the switch, dropping interest rates which powered the economy forward. Former Fed Chair Alan Greenspan called Volker, “the most effective chairman in the history of the Federal reserve.”5
I believe that Paul Volker is regarded as a hero among many economists. He is credited with having the courage to do the right – and difficult — thing. But for these same economists and for the twelve FED voting members, I believe that the Nixon/Volker saga is also a cautionary tale. My strong sense is that the FED strongly wants to avoid needing to administer another Volker shock – and we probably all support that. The FED would much rather head inflation off at the pass vs. allowing it to become an entrenched, large issue.
We saw the FED heading inflation off at the pass in 2022, when it administered a “mini Volker.” At that time, the FED aggressively hiked interest rates to fight 9% inflation. There was some pain, but compared to a “full Volker,” the pain was shallow and short-lived.
Over the last fifteen months, the FED has flipped the switch, cutting interest rates six times from approximately 5% to 3.75% today.7 That does leave some room for further reductions — except that the current inflation rate of 2.7% is higher than the FED’s 2% target. If the FED would be allowed continuing independence, we suspect it might pause rate cuts at this point and then continue to move forward in a balanced way, considering unemployment and inflation.3 But, we also strongly expect the FED will come under high pressure to reduce interest rates, and the FED Board may do so, seeking to bend vs. break.
Looking at all the factors, our outlook is that interest rates are likely to decrease over the coming year, perhaps more than they “should,” which can juice both stock and bond values over the next one to two years. If this spurs inflation down the line, we’ll be ready to step in with inflation fighters including commodities and treasury inflated bonds – in our 26 year wealth management practice, we’re been there before.
LWP Monthly Investment Committee Meeting
Our investment committee, consisting of seven members including our outside consultants, meets monthly to set investment strategies on your behalf. As a group, we bring over 100 years of experience to your investing. Though we have much dialogue, I ultimately approve strategy and investment tool changes.
At our recent monthly meeting, not only did we discuss interest rates, but the direction of the dollar. If U.S. interest rates fall, some foreign dollars invested in the U.S. may leave for greener pastures, causing the U.S. dollar to fall. This is likely to benefit international stocks and bonds held in the hands of U.S. investors, i.e., all of us. For this reason, we have decided (as suitable) to add an international emerging markets bond position that also currently offers a 10% interest yield.
We reviewed the performance of our bond alternative investments – used as suitable in portfolios — and are pleased with the results. We also reviewed the specific performance of U.S. stock investment tools and will be making two replacements in January for ESG-oriented portfolios in January (again, as suitable).
While we believe that interest rates are likely to fall, we recognize that U.S. growth/tech stocks have reached high valuations, making them more vulnerable to pullback. Overall, we see a “push pull” between the risks created by this overvaluation and the likely coming interest cuts. For that reason, we are not overweighting equities, which we often do (as suitable) but are generally targeting a neutral allocation – an allocation that is customized to match your desired risk/reward strategy.
Note that you’ll receive an email from us if and as we update your portfolio.
As this year is coming to a close, we wish you peace and fulfillment, with, perhaps, some adventure thrown in. Making a difference for you offers me such fulfillment. And, with the support to all of us of our wonderful LWP team, I have flexibility (even as I work full time). My adventures will include enjoying one-on-one time with Anthony, my 18 month old grandson, who copies everything, and a bucket trip list to Peru.
As ever, please let us know your questions and comments.
Written with research support from Copilot and Google AI.
FOOTNOTES
1 Journal of Economic Perspectives, Abrams, Burton, A. 2006. “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes.” Journal of Economic Perspectives 20 (4): 177–188.
2 Federal Reserve, “From Staglation to the Great Moderation,” by Vanessa Sumo.
3 Per the Wall Street Journal article, “Fed’s Fractured Vote Signals Trouble Ahead for Future Rate Cuts,” published December 10, 2025.
4 ”The ripple effect of the Volcker Sock for the economy.” September 11, 2021 by J. Giglio.
5 ”When Volcker ruled the Fed, ‘people thought they’d never buy a home again,’” Pati Domm, December 9, 2019.
6 Per Wikipedia.
7 ”Federal Funds Rate History 1990 to 2025,” Taylor Tapper, December 10, 2025.
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