Tickle Me Elmo's lesson for Trump

It was 1996, the Christmas shopping season had not yet started, but it was increasingly clear to young parents that the hot toy that year was Tickle Me Elmo. The toy version of the popular Muppet character that when squeezed would giggle, shake and vibrate was flying off store shelves and retailers were having a difficult time keeping up with demand. My 7-year-old daughter had to have one, and my wife was on a mission to acquire the toy that was in such short supply that customers were driving hundreds of miles just to get one of these elusive toys or excusing themselves from important business meetings on the rumor that a local store had just received a shipment.

Tariffs put in place on Liberation Day, April 2, 2025, are having their intended effect -- slowing down shipments of all products from China, including toys. President Donald Trump recently responded when confronted with the question of toys, by saying maybe children should settle for two toys instead of dozens of toys this Christmas season. This is spoken like a man who might be a father, but never parented a 7-year-old. We are likely to have countless examples of Tickle Me Elmo shortages this holiday season because of Trump's tariffs.

Treasury Secretary Scott Bessent joined this conversation by saying Federal Reserve (Fed) Chairman Jerome Powell should lower interest rates to encourage economic activity. The problem facing the administration is that they are pursuing a fiscal policy designed to slow the economy (tariffs) while asking the Federal Reserve to pursue a policy to expand the economy.

There are times when it might be appropriate to have monetary policy at the Fed going in the opposite direction as fiscal policy in the Executive and Legislative branches. But this is not one of those times. Lowering interest rates has no effect to counter the damage done by Trump's tariffs, which is why Chairman Powell has resisted the administration's push to have him lower rates. In fact, lowering rates now, given the supply chain problems caused by Trump's tariffs, would only make the shortages worse, not better.

This is not the first time a president has attempted to get the Fed to change its policy. Usually, this conflict is the result of politics. The Fed's primary mission is to encourage non-inflationary growth in the U.S. economy. Presidents, on the other hand, are either running for their next term or are seeking higher approval ratings if they are term limited. President Trump, "the great negotiator," has placed himself in a difficult position with his tariffs and his public criticism of Chairman Powell. At one point, Trump talked about replacing Powell before his term is up because in his view, the Fed is not "doing enough" to encourage economic growth. But because Powell does not work for the president, he does not have to do what the president wants him to do, particularly if the president is demanding something that conflicts with the Fed's core mission of non-inflationary growth.

There is something different about this Kabuki Play than past disputes between presidents and Fed chairs. It is usually the case that presidents want the Fed to lower rates when the economy is slowing down because of normal swings in the business cycle. This time, it is the president's own actions that have caused the slow-down in economic activity and the prospect of a Trump caused tariff recession. Under these conditions, Fed Chair Powell is correct in not countering the effect of this man-made slowdown by lowering interest rates. Why should he accommodate economic malpractice by the President of the United States. The Fed and the American people should not desire a Fed that rewards macroeconomic mismanagement by the Executive Branch or Congress.

The pressure to change Fed policy is going to be considerable. The administration and the dwindling number of supporters of tariffs will attempt to shift blame for the coming recession on Powell and not their tariffs. While it is too early to say we are in a recession, the first condition for officially being in a recession was satisfied in recent days when first quarter GDP growth turned negative. Two successive quarterly declines in real GDP are what counts as a recession. We now have the first quarterly decline, and the first decline in quarterly GDP since early 2020 during Trump's first term in office.

The solution to this dilemma is for the president to call off these tariffs. GM announced that they are expecting a $5 billion increase in tariff payments. GM is going to try to pass all these new expenses on to their car buyers. The only alternative to passing on these costs are for impacted companies to pay for tariffs out of their profits, and that is not going to happen. The administration thinks the other alternative is for exporters to lower their prices, in effect lower their profits. That is not going to happen either. So, the bottom line is prices will go up, shelves will be empty this holiday season, unemployment will increase, the economy will go into recession, and the Fed will hold steady if these tariffs remain in place.

Powell knows he is in the driver's seat. It is only a matter of time before President Trump realizes that. Unfortunately, in the meantime, American consumers and small businesses will suffer.

Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm that conducts public and private research since 1999, and is the emeritus director of the Peoples Center for Innovation and Entrepreneurship at Quinnipiac University.