(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, July 16 (Reuters) - While almost no

one thinks Donald Trump's verbal attacks on Federal Reserve

Chair Jerome Powell are a positive development, they have

electrified the debate about whether the U.S. president is right

that interest rates are too high.

Presidential tirades aside, there is a strong case to be

made that the fed funds rate should be lower than its current

4.25-4.50% target range. The labor market is beginning to show

signs of cracking, 'hard' economic data is softening, and a

tariff-led slowdown may be in the offing.

On the other hand, economic growth is clocking in at an

annualized pace of around 2.5% and not expected to dip much

below 2% next year, unemployment is still historically low, the

stock market is at a record peak, and other financial assets

like bitcoin have also never been higher. And, crucially, core

inflation is still almost a percentage point above the Fed's 2%

target, suggesting that we may be starting to see the

inflationary impact of tariffs.

By those measures, policy may be too loose, not too tight.

Indeed, Jason Thomas, head of global research and investment

strategy at Carlyle, reckons financial conditions are "unusually

accommodative", and argues that had the Fed not said in December

that policy was 'restrictive', there would be no need to explain

why it hadn't cut rates six months later.

The president clearly does not agree. Trump is clamoring for

borrowing costs to be slashed by 300 basis points. That would

take the policy rate closer to 1%, a level usually associated

with severe financial market stress, strong disinflationary

pressures or a deep economic funk. Or all three.

R-STAR GAZING

One would be hard-pressed to find many experts who would

agree with Trump's call, even those who fall on the dovish side.

But then where should rates be?

Policymakers typically use forward-looking models and

frameworks to inform their decisions. The most famous of these,

so-called 'R-Star', comes in for a lot of criticism, as it is

theoretical, referring to the inflation-adjusted long-term

neutral interest rate that neither accelerates nor slows growth

when inflation is at target. This may be a fuzzy concept, but

officials look at it, so investors cannot dismiss it completely.

There are two benchmark 'R-Star' models, both partly created

by New York Fed President John Williams. One currently puts this

rate at around 0.80% and the other around 1.35%. If inflation

were at the Fed's target 2%, then these models would put the

nominal fed funds rate at around 2.80% or 3.35%, respectively.

Fed policymakers split the difference in their latest median

projections, putting the long-term nominal Fed funds rate right

at 3.00%.

If these estimates are anywhere close to accurate, the

nominal policy target range of 4.25-4.50% now appears to be

restrictive, so the path ahead is lower.

Rates traders and investors seem to agree. While the latest

CPI report has caused jitters at the long end of the yield

curve, rates markets are still pricing in more than 100 basis

points of easing over the next 18 months.

But this has helped fuel the asset price rally, which,

ironically, strengthens the argument that policy may be closer

to neutral than models suggest.

WISHFUL THINKING

Powell may have backed the Fed into a corner by maintaining

that policy is still restrictive, albeit "modestly" so.

These claims signal the Fed will lower rates, but it has not

done so, as it is waiting to see if Trump's protectionist trade

agenda unleashes inflation. Moreover, it also does not want to

appear to be responding to political pressure to cut rates.

"Some will say this collision was unavoidable. But the Fed

would find itself in a far more defensible position had it

embraced a posture of neutrality, pledging to cut or hike as

warranted by future developments (including policy shifts),"

Carlyle's Thomas wrote on Tuesday.

In short, the Fed is in a bit of a bind, and Trump's attacks

will only make it worse. His call for 300 basis points of rate

cuts may end up being similar to his 'reciprocal tariff' gambit:

aim extremely high, settle for something less, and claim

victory.

The problem, of course, is that monetary policy is not

supposed to be a negotiation.

(The opinions expressed here are those of the author, a

columnist for Reuters)