By Nicole Goodkind

The Trump White House and its allies have shown little confidence in the Fed's economic models, insisting that the central bank's forecasts are wrong. The criticism underlies President Donald Trump's repeated calls for lower interest rates, and shaped the president's lengthy search for a successor to Fed Chair Jerome Powell, whose term ends in May.

Officials close to Trump, including Fed Governor Stephen Miran, a recent appointee and former White House official, have argued that the Fed is relying excessively on backward-looking data, overstating housing inflation and underestimating productivity gains from artificial intelligence and deregulation. Former Fed Governor Kevin Warsh, Trump's nominee for chair, has made similar claims. As a result, these officials say, interest rates are higher than they should be, and the Fed can afford to ease sooner and more aggressively.

Powell has rejected such critiques. "As somebody on the inside, they just don't make sense," he said, in answer to a question from Barron's at his most recent press conference in late January.

Federal Reserve Governor Michael Barr clarified Tuesday in a speech in New York why that is so. "There are lots of inputs" to underlying models, he said. But the main inputs show that when productivity increases, "potential output goes up, growth goes up, business investment goes up. There's more demand for business investment. The savings rate falls because people are anticipating larger lifetime earnings."

And all of that suggests a higher rate of inflation, he said.

The debate about how to measure and forecast economic conditions, including productivity, is about to get a lot noisier as hearings on Warsh's nomination loom. It may be an arcane discussion to most people, but the real-world implications of overhauling the Fed's models are vast, and could shape monetary policy for years to come.

The Fed employed about 24,000 people across its Board of Governors and 12 regional banks as of 2024, including many economists who use decades of data on the historical relationships among inflation, growth, and employment to build models that predict future trends. Officials rely on these models and their judgment regarding developments that can't be forecast, such as tariffs and the Covid pandemic, to develop forecasts and set monetary policy.

Productivity benefits from AI are hardly an afterthought, Powell said at the January press conference. "We are well aware that higher productivity means higher potential output, and it changes the way you think about, potentially, inflation growth, [the] labor market, and all those things," he said. "That's all in our models."

The members of the central bank's Federal Open Market Committee submit their near- and longer-term projections every quarter for growth, inflation, unemployment, and the appropriate path of interest rates. Those individual forecasts are compiled into the Summary of Economic Projections, a document that can move markets upon its quarterly release.

The median projection in December put core inflation, as measured by the personal consumption expenditures price index, at about 2.5% by the end of 2026, below current levels, and at 2.1% in 2027, marking a gradual return to the Fed's 2% annual target. Policymakers also projected that the unemployment rate would drift upward, to around 4.4%, before edging lower again.

The median interest-rate path pointed to only modest reductions, with the federal-funds-rate target range in the low-to-mid 3% area by the end of this year. It is currently at 3.50%-3.75%.

These projections will be updated at the FOMC's March meeting. If officials believe inflation is cooling faster than expected or that productivity gains are durable, the rate path could shift to show more cuts this year.

Still, Treasury Secretary Scott Bessent said in a recent interview on Bloomberg Television that if one looks at "any model" for the appropriate policy rate, it suggests the federal-funds rate should be 150 to 175 basis points, or 1.5 to 1.75 percentage points, lower than the current effective level. That would put rates closer to the mid-2% range, territory rarely associated with inflation in excess of 2%.

Bessent didn't clarify which models he had in mind.

The Taylor Rule, a benchmark once favored by the Fed that links interest rates to inflation and economic slack, currently implies that policy should be tighter, not looser.

"I mean, if it's a question of using better models, bring them on," Powell said at the press conference. "Where are they? We'll take them. But I think we certainly are in contact with anybody who does economic modeling."

Under Powell, who has stressed the Fed's data dependence, and other recent Fed chairs, the FOMC has anchored its decisions in realized inflation and labor-market conditions. Core price growth remains above 2%, wage growth has firmed, and job creation remains positive, readings that together argue for patience in bringing down rates.

Easing policy now would require the committee to place more weight on projected supply-side gains than realized inflation data. Miran's argument is that judgment today should account more forcefully for deregulation and AI-driven productivity that could expand potential output and allow inflation to fall without a slowdown.

Powell's counterpoint is that while those possibilities are incorporated into the Fed's projections, their magnitude and persistence remain uncertain. Acting on them before they are visible in sustained data would amount to a policy bet.

Warsh, whose nomination must be confirmed by the Senate, has criticized the Fed's meeting-by-meeting approach to setting policy, and argued for clearer frameworks that make the Fed's reaction function easier to anticipate. The chair is only one vote on the 12-member FOMC, but leadership shapes how assumptions are debated and framed.

If a future committee were to assume stronger productivity gains or faster supply expansion, that shift would first appear in the Summary of Economic Projections as a lower projected path for the federal-funds rate. The dots would likely move before the policy rate changes.

That change could influence how data are translated into rate decisions and how much confidence policymakers place in projected productivity gains. A committee that sees supply expanding quickly can tolerate firmer growth without tightening. One that doubts those gains will persist will move more cautiously.

The March 17-18 meeting will offer the next signal. When the updated projections are released, investors will see whether confidence in productivity gains has begun to show up in the dots or whether caution still dominates the committee's outlook.

But the debate about the Fed's models won't end there.

Write to Nicole Goodkind at nicole.goodkind@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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February 18, 2026 01:30 ET (06:30 GMT)

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