‘You will lose your credibility’ if you cut interest rates, billionaire Ray Dalio tells Trump’s Fed chief pick as stagflation may be here already
Kevin Warsh, nominee for US Federal Reserve Chair, testifies during a Senate Banking Committee hearing on his nomination.
In a recent CNBC interview, President Donald J. Trump said he would be disappointed if Kevin Warsh, his pick to take over from Jerome Powell as Fed Chair, didn’t lower interest rates immediately (1).
At least one billionaire investor hopes Trump will be disappointed.
Ray Dalio, founder of Bridgewater Associates, told (2) CNBC that cutting rates in this economy would be a bad move because of stagflation, a situation that occurs when inflation is up amid a weak economy.
“You will lose your credibility,” Dalio said of Warsh’s fate if he lowers rates. “The Federal Reserve would lose its credibility, particularly now.”
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But Trump has made it no secret that he wants interest rates down. Since he was inaugurated, he’s been criticizing Powell over the Federal Reserve Bank’s decisions not to lower rates (3).
Trump even threatened a criminal probe into Powell himself over cost overruns in renovations at the Fed headquarters. Powell called it out as a form of “political pressure or intimidation (4)” to lower rates. The personal inquiry into Powell has since been dropped (5).
Why does Trump want the central bank to lower rates, and why does Dalio disagree? Here’s what to know — and how it could affect your finances.
Lowering interest rates won’t help during stagflation
One of the Federal Reserve’s major responsibilities is controlling the federal funds rate. Several times each year, the Fed meets to decide whether it lowers, raises or keeps the federal funds rate the same. Whatever it decides, consumer interest rates generally follow suit.
Federal fund rate cuts tend to be good for the stock market. And what’s good for the stock market is good for Trump, both as a president and investor. A soaring stock market is good for his reputation as POTUS and his personal portfolio (6).
But the Fed is worried about more than the stock market. Its dual mandate is to maximize employment while keeping inflation low (7). Generally, inflation goes up when the central bank lowers rates, since borrowing is cheaper and businesses can expand more easily (8).
The Federal Reserve generally aims for a 2% year-over-year inflation rate (9), using the Consumer Price Index as its inflation benchmark. In March, the CPI year-over-year inflation rate was 3.3% (10).
If people are already struggling with inflation, as they are now, lowering rates could make their situation worse by exacerbating inflation. In other words, it would be a stagflationary situation.
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Dalio says that choosing to cut rates could signal that Warsh isn’t being objective as the new Fed Chair.
“Everyone’s going to look at how he behaves, in terms of monetary policy,” he says.
Warsh won’t be chair by the next Federal Reserve decision on April 29. But he could be Chair by the next rate-setting meeting in mid-June (11).
The FedWatch, a tool that predicts what the Federal Reserve will decide to do with the Federal Funds rate, says that there’s a 100% chance the Fed will keep rates the same on April 29 (12).
It currently predicts an over 90% chance that rates will stay the same in June, but that might change if Warsh is appointed.
What Federal Reserve decisions mean for your wallet
If Warsh lowers rates, it could further drive inflation on gas, groceries, and other goods — already costly thanks to the Iran war.
Meanwhile, interest earned on consumer banking products like savings accounts and CDs will likely go down as well. Right now, consumer banking rates are outpacing inflation; that’s historically rare, and it might change if Warsh brings the federal funds rate down.
On the upside, consumer loans and credit cards might go down if the Fed cuts rates. Fixed-rate mortgages could go down as well, but the federal funds rate doesn’t have as strong an impact on them like it does other consumer interest rates (13).
Even if, as predicted, Warsh holds rates steady, inflation won’t necessarily hold. Other market impacts could cause inflation to go up or down, such as continuing developments in the Iran war.
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Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
CNBC (1),(2),(11); NBC News (3); U.S. Federal Reserve (4),(8),(9); NPR (5); Forbes (6); Federal Reserve Bank of St. Louis (7),(13); U.S. Bureau of Labor Statistics (10); CME Group (12)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.