Rate Cuts and Tariffs: Echoes of the Road to the Great Depression

The Fed cut rates for the third time this year and projects just one more cut in 2026 and another in 2027—signaling a deliberate pause. Whether policy stays cautious or turns more dovish may depend on who Trump picks to replace Chairman Powell in May 2026, likely with a chair more amenable to easier policy. There’s a lot of celebration right now. These are champagne-popping moments for markets and Wall Street. The Dow jumps, money becomes cheaper, and consumers get real wins on financing for homes, auto loans, and better credit card rates.

But the celebration overlooks a critical problem. It boils down to 12 people with all of the control, unable to reach consensus on the price of money in a $29 trillion economy. What the Fed overlooks is the nature of the market itself. People decide their time preferences individually—whether to save or spend, consume now or invest for later. When rates are set below what a free market would naturally create, the Fed sends false signals to the entire economy. They misdirect investment, create artificial booms, and then blame “market panic” when reality catches up.

History offers a cautionary tale—and an alternative model. It appears we have put a lot of misplaced trust in the Fed, and it’s understandable as to why. We are taught that the Fed ultimately saved us from the Great Depression and corrected the Crash of 1929, however, a deeper look into history tells a different story. The 1920s tell an interesting story, a tale of two Washington approaches. Let’s look at what caused the crash and what we could have done differently. After the sharp 1920–21 deflation, the Fed kept its policy rate relatively low and bought a lot of securities, which pumped reserves into the banking system and drove rapid growth in bank credit even though consumer prices looked stable. But with productivity rising, “stable prices” actually meant money was too loose: the Fed pushed interest rates below the level consistent with actual savings indicators, so long‑term projects in construction, heavy industry, and stocks exploded in a way that looked like genuine prosperity but was really malinvestment.

Banks were funding projects that only made sense in a world of fake cheap money. When the Fed finally tightened in 1928-29 to stop speculation and protect gold reserves, the whole thing came crashing down. All those investments that looked brilliant at 3 percent rates suddenly looked like a major mistake at 6 percent. Asset prices tanked. Projects got scrapped. Banks that had lent against inflated values were suddenly underwater. From this view, tight money in 1928–29 didn’t cause the Depression so much as reveal and unwind the decade-long, Fed-fueled credit boom.

This approach contrasted drastically from the beginning of the decade. After World War I, the U.S. experienced a brutal but short-lived deflationary period where prices fell sharply and output contracted. President Harding resisted calls for aggressive stimulus and instead cut spending, reduced debt, and allowed wages and prices to adjust on their own. Within 24 months, output and employment rebounded and the economy entered what many describe as an exceptionally strong expansion through the 1920s. This model should have been the blueprint for all future cases. Accept the correction, avoid the “too big to fail” model, and let prices and rates realign as the market would naturally dictate. It worked.

What came next is where the narrative was retold. Hoover came into the Presidency touted by historians as a “do nothing” President, a laissez-faire advocate. This couldn’t be further from the truth. He supported a heavy interventionist strategy, pushing a cartel-style agenda to stop prices and wages from crashing. He pressured businesses to inflate wages, signed off on a massive tax increase in 1932, expanded public works, backed farm support programs, and created the Reconstruction Finance Corporation (RFC)—a federal agency that lent billions to failing banks and businesses, the clear predecessor to today’s “too big to fail” bailouts. This is hardly laissez-faire. Hoover effectively blocked the natural correction from taking place. Fixed prices misallocated resources and the Smoot-Hawley tariffs had devastating results: world trade plummeted by 66% between 1929 and 1934, unemployment exploded from 3% in 1929 to 25% by 1933, markets collapsed, and millions of jobs vanished. These protectionist policies compounded the crisis, hurting everyone from farmers to businesses and worsening economic distress at an international level.

Then FDR came in and doubled down on everything Hoover started. Bank holidays, abandoning the gold standard, price-fixing codes through the National Recovery Administration (NRA)—FDR even had farmers destroy crops and livestock to raise prices while people were starving. The New Deal was permanent experimentation, throwing everything at the wall to see what stuck. Both presidents were activists who intervened heavily. The myth of Hoover doing nothing is just that—a myth. And their policies likely made the Depression last longer than it should have.

We know the history, and we’d be wise not to repeat the mistakes of the past. But at the moment we’re following several plays from the 1920-1930s playbook. We’re turning on the money printer, keeping rates artificially low, making large asset purchases and fueling a boom with flat prices. When things tighten, expect to see a crash similar to previous ones. The Fed lacks the crystal ball to see into the future, yet they are once again attempting to manage growth, jobs and inflation—again, a 12-person committee making the decision, not us. This will inevitably lead to malinvestment with money flowing to projects built on nothing real.

Concurrently, we are in the middle of a trade war with threatened 60% tariffs on China and renewed steel and aluminum hikes—conjuring the ghost of Smoot-Hawley. Billions in subsidies flow through the CHIPS and Inflation Reduction Acts, picking winners just as Hoover and FDR propped up favored sectors. Hoover and FDR responded with price controls, public works, and wage supports which prevented fast adjustment and dragged the Depression out for over a decade. We’re repeating the pattern. Fiscal stimulus on top of structural deficits. A Fed that never lets the correction happen, alongside a government that engages in inflationary practices. We’ve provided easy money and created a protectionist environment fueled by intervention. We learned this lesson 90 years ago and chose to ignore it. The pendulum will swing back, and the bill will come due—probably as stalled growth, renewed inflation, or a correction worse than it needs to be. When a new Fed chair takes over in 2026, the real question isn’t whether they’ll be dovish or hawkish. It’s whether we keep trusting 12 people to set the price of money in a $29 trillion economy. History says we shouldn’t.