Trump Wants Fed To Cut Interest Rates; Why Powell Has Resisted

Forbes

a day ago

WASHINGTON, DC - NOVEMBER 02: (L to R) U.S. President Donald Trump looks on as his nominee for the ... More chairman of the Federal Reserve Jerome Powell takes to the podium during a press event in the Rose Garden at the White House, November 2, 2017 in Washington, DC. Current Federal Reserve chair Janet Yellen's term expires in February. (Photo by) Getty Images
President Trump has repeatedly called Federal Reserve Board Chair Jerome Powell stupid, terrible, a fool, and referred to him as a person of average mentality. There are more examples of Trump's juvenile jabs, but you get the idea. Why would the President resort to name calling on a person that he himself appointed to the position? I found two primary reasons, and we will examine both. First, we need to fully understand the role of the Fed and its relationship with a sitting President.
The Fed is an independent, non-political entity. That means, it acts without consideration for any political party. Moreover, the Fed has a dual mandate which is to promote maximum employment and stable prices. The Fed also sets bank reserve requirements, which is the percentage of deposits a commercial bank must hold in reserve.
One of the Fed's mandates, maximum employment, does not imply a 0% unemployment rate. Rather, it means the lowest rate of unemployment it can achieve without causing inflation. Thus, it is not a set percentage. Stable prices are another Fed mandate which in effect means the Fed is tasked with preventing inflation from becoming too high. The Fed's inflation target rate of 2.0% is less than one-half percent below the current rate of 2.4% as of May 2025. It is this latter issue where we will focus much of our discussion.
Perhaps we should first ask why the President is pushing so hard for a rate cut. Enter Trump's tariffs. Tariffs are generally considered to be inflationary as they can add to the final cost of imported goods and services. However, tariffs can also slow economic growth as they can cause a reduction in supply, which can lead to less consumer spending. A slower economy is not what the President wants and so he is pushing for a rate cut.
Historically, tariffs have not caused inflation. This time could be different. Inflation is a risk from the current budget bill awaiting Congressional approval. Why? Because the bill has provisions for a great deal of spending, which will require more money to run the government, which will expand the money supply. An expanded money supply will create more demand while tariffs could cause a supply shortage. More demand and less supply is the very definition of inflation. Powell understands that if the Fed did reduce rates during a strong economy, inflation could reemerge. Therefore, Powell is waiting to see what the data shows in the coming months before cutting rates.
Another reason Trump is pushing Powell to cut rates has to do with the amount of money needed to service the debt. The national debt has just surpassed $37 trillion and is expected to reach $47 trillion in only four years. It is estimated that about 32% of the national debt (about $12 trillion) will mature within the next 12 months. If the Fed cuts rates, the federal government could roll the maturing debt into short-term debt at a lower rate. This could reduce the amount of money needed to pay the debt (i.e., less interest equals lower debt payments).
Thus, the President is willing to risk inflation to support his tariff and trade policy. Conversely, the Fed is more concerned with inflation than with Trump's policies, leading to the disagreement between the two.
The U.S. has one of the higher short-term rates among G-20 nations. The rate in America is 4.50% compared to the United Kingdom at 4.25%, Australia at 3.85%, China at 3.00%, Canada at 2.75% and the European Union at 2.15%. Most of the other countries mentioned are also experiencing slower economic growth, making rate cuts more logical. Trump has said that Great Britain's central bank has lowered rates several times so Powell should do the same. However, the U.S. is not Great Britain and comparing the two economies is like comparing apples and oranges. A final reason Trump may want Powell to cut rates is that higher rates could cause the U.S. dollar to strengthen, making exports more expensive. Since one goal is to reduce the trade deficit, a stronger dollar could work against that. Trump Versus Powell
Thus far Powell has resisted the jabs from Trump and has kept an independent posture on monetary policy. It is assumed that Trump will replace Powell when his term ends in May 2026. If Trump chooses Powell's replacement well before the end of Powell's term, financial markets could falter. Why? Financial markets like an independent Fed and anything to disrupt that would be seen as a negative.
In short, Trump wants what he wants (and often gets it) and Powell is focused on the Fed's mandates of stable prices and full employment. It's impossible to say where this will end, but many believe President Trump is playing with fire in that if he continues to meddle in the Fed's business, the fallout could be significant. It's clear that Powell is not stupid. While there is no way to figure out the average IQ of a Fed President, most believe someone in such a prominent position has above-average intelligence and Powell is no exception.