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The more Trump pressures the Fed, the less likely he gets lower rates

The more Trump pressures the Fed, the less likely he gets lower rates

Mint25-07-2025
President Trump has talked of slashing interest rates by 3 percentage points, which would mark a radical shift and upend conventional economic models.
The Trump administration has ramped up its attacks on Fed Chairman Jerome Powell in the past few weeks as the president pushes for lower interest rates. The louder he shouts, the less likely he is to get what he really wants: lower government borrowing costs and cheaper mortgages.
At the highest level the dispute between the White House and the Fed is a battle about institutions versus populism, the question of whether experts operating at arms length from the government will do a better job than the elected politician of the day.
President Trump's views are captured by the Latin phrase vox populi, vox dei: The voice of the people is the voice of God. The Fed is exactly the opposite, deliberately set up not to be beholden to day-to-day politics.
The two sides disagree about the economics of tariffs, which the administration expects to have little effect on prices. The Fed—burned by its mistake in missing the inflationary boom under former President Joe Biden—is waiting to see if tariffs feed through into higher prices before restarting rate cuts.
Republicans have been happy to weaponize both Powell's failure to act quickly against the Biden-era inflation and the Fed's handling of cost overruns on a big office redevelopment, which Trump visited on Thursday. But both are merely sticks to beat the Fed into lowering rates.
Trump has talked of slashing interest rates by 3 percentage points, which would mark a radical shift and upend conventional economic models. I could talk about the rapid feed through into inflation likely to follow from such arbitrarily low rates at a time of a decent economy. But let's assume that is just rhetoric and what he really wants is rate cuts sooner and larger than the market is pricing. Futures are priced for almost no chance of a cut next week and about a 60% chance of a cut in September, with 1 percentage point of cuts by the midterms next year.
The problem is that how rate cuts are achieved matters, because the Fed's institutional structure matters. At one extreme if the Fed cut rates because Trump broke the Fed's independence, it would trash investor confidence and push up Treasury yields.
Signs of this show up every time Trump launches a new assault on Powell, including last week.
The day after his call for a three-point rate cut, the New York Fed's measure of the 10-year term premium, the extra yield baked into Treasurys to compensate for the risk of locking up money for a decade, rose to 0.84 percentage point. That is up from 0.6 point after he backed down from similar attacks in April—and from zero a month before the election last year.
The more politics enters into interest rates, the more volatile inflation is likely to be, and the more compensation investors will want for long-term investing.
The same issue would come if Trump tried to dismiss Powell for cause before his term ends next May, or if calls by some Republicans to change the law governing the Fed left it beholden to pressure from Congress.
Investors would expect politicians to take the easy route, preferring to accept a bit of inflation to nudge up growth, especially ahead of elections. Again, they would want compensation in the form of higher bond yields. That would mean higher mortgage rates and higher financing costs for longer-dated government borrowing, the opposite of what Trump wants.
Construction on the Federal Reserve building in Washington, D.C.
The strength of this investor belief was demonstrated most clearly in the U.K., when a new government in 1997 surprised markets by making the Bank of England independent. Bond yields adjusted over the course of a few days to price in inflation coming in a third of a percentage point lower over the long run once the politicians gave up direct control of monetary policy—allowing permanently lower interest rates.
Trump is misguided in thinking Fed cuts would necessarily feed through into cheaper mortgages, because the standard 30-year fixed-rate mortgage depends not on the overnight interest rate set by the Fed but on long-dated Treasury yields.
'People aren't able to buy a house because this guy [Powell] is a numbskull," Trump said this week. 'He keeps the rates too high, and is probably doing it for political reasons."
There is a loose connection between Fed rates and mortgage rates over long periods, but they can move significantly in opposite directions, especially if the market thinks the Fed is making a mistake. Since the central bank started cutting last September, overnight rates are down a full percentage point, while the 30-year mortgage rate is up from 6.2% to 6.75%.
I'm broadly in favor of the Fed's precautionary approach to the inflationary effect of tariffs, because a second inflation shock in five years would be so damaging, and I don't think interest rates are especially high given the strength of the economy. But monetary policy isn't a science, and there is a perfectly reasonable case to be made for cuts to begin next week.
A half-decent case can be made for the Federal Reserve cutting rates faster than markets expect. But it can't be made by the president. The case would point out that tariffs haven't boosted inflation much so far; that inflation, measured the way the Fed prefers, is only just above target and is in line with the average this century, and that rates are still high.
The handful of trade deals Trump has done involved tariffs that are too high for my taste but still far below the scary-high levels of April. Inflation expectations are under control, private-sector hiring is weak and wage growth has slowed somewhat. Meanwhile, signs of stress from high rates are visible in elevated delinquencies for student loans, credit cards and auto loans.
It is clearly frustrating for Trump that Powell is delaying cuts. But better to wait than to have the higher bond yields that come with attacking Fed independence, let alone the chaotic interest rates that come with politicians—and their electoral cycles—taking over rate-setting.
If Trump thinks the Fed is hard to deal with, wait until he tries to negotiate with the bond market.
Write to James Mackintosh at james.mackintosh@wsj.com
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