Commentary: Trump is acting like the economy's in distress
President Trump wants the Federal Reserve to cut short-term interest rates all the way to 1%. That’s something the Fed would typically do only in an emergency situation, such as a sudden recession or financial panic. What is Trump so worried about?
Short-term rates are currently at about 4.25%. The historical average is 4.6%. The Fed moves rates up or down to manage inflation and keep the economy healthy. It has signaled that it may lower rates to around 3.5% during the next year or so if inflation eases.
But Trump’s own tariffs are standing in the way. By putting new taxes on roughly $3 billion worth of imports, Trump is raising costs on businesses and consumers. Most economists think the tariffs will push inflation up by a percentage point or so, from 2.4% now to 3.5% or a little higher.
Read more: What Trump’s tariffs mean for the economy and your wallet
Trump doesn’t seem to care about inflation, even though he ran for president last year promising to “bring prices way down.” He’s been hectoring the Fed and its chair, Jerome Powell, to cut rates for months, first by one point, then by two, and now by more than three. “Right on track to demand negative interest rates somewhere after July 4,” Jim Bianco of Bianco Research quipped recently on social media.
The Fed cuts rates when it feels inflation is under control and the economy might need a little bit of juice. Lower rates make borrowing cheaper, stimulating spending and investment. In normal times, the Fed cuts gradually, by a quarter-point once every couple of months. But it can cut aggressively when needed. During the Great Recession from 2007 to 2009, the Fed cut rates by nearly 5 points in 15 months. After the COVID pandemic erupted in 2020 and there was a sudden recession, the Fed cut by 1.5 points in two months.
Anything more than a quarter-point cut usually signals that something is wrong. Trump wants a rate cut of recessionary proportions. Somebody must be telling him we have a problem, Houston.
Trump’s economic advisers, including Treasury Secretary Scott Bessent and White House economist Kevin Hassett, are publicly bullish on the economy. That’s their job. But they probably have the same concerns many economists and investors have: The economy seems to be slowing, the job market is weakening, the national debt is growing unsustainably large, and, yes, the Trump tariffs will cause more harm than good.
One cause Trump has championed during both presidential terms is lower rates to make federal borrowing cheaper. Trump regularly talks about “refinancing” the government’s debt, something he practiced frequently as a real estate developer operating with borrowed money.
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Relatively low rates during recent years brought the average rate the government pays on all of its debt from 5% in 2007 to just 1.6% in 2022. The government benefited, like all other borrowers, from those aggressive Fed rate cuts in 2020. But the government’s average borrowing rate has since jumped back to 3.3% at the same time federal deficits have swelled to nearly $2 trillion per year. Annual interest payments on the debt now top $1 trillion, the second-largest federal spending category after Social Security.
Trump is no budget hawk. The tax-cut bill he’s pushing through Congress will add another $4 trillion or so to the national debt, which is certain to top $40 trillion by the end of the decade. But Trump ought to know that some president soon is going to have to deal with the ramifications of a gigantic national debt, and it might end up being him.
Already, there are signs the unprecedented gusher of federal debt is rattling financial markets. All three major ratings agencies have now downgraded the US credit rating. Long-term interest rates have been higher this year than they ought to be, which is exactly what happens when there’s more debt than markets can absorb. That’s contributing to a weakening dollar and a “sell America” trade in which foreign assets start to look more attractive than American ones.
If Trump got his way, sharply lower rates would obviously reduce the government’s borrowing costs. But it wouldn’t do anything to solve the underlying problems, which are too much debt in the first place and a spendthrift Congress that won’t do anything about it.
Trump may also be worried about the slowing economy, which turned in negative GDP growth in the first quarter. Job openings are trending lower, consumer confidence stinks (as usual), and Americans are increasingly worried about the labor market. If the economy is truly weakening, the Fed will undoubtedly cut rates at some point. Just not as much as Trump wants.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
Banking analyst Chris Whalen thinks the Fed could ultimately cut short-term rates from 4.25% now to 3%. But he also thinks long-term rates on mortgages and other consumer and business loans are likely to go up rather than down because of all the additional deficit spending coming in Trump’s tax-cut bill. That could be a stagflation scenario in which growth stalls but inflation and interest rates stay unusually high, which would make voters even surlier.
There’s probably one other reason for Trump’s radical interest rate stance. Trump has attacked Powell so frequently — calling him “numbskull,” “dummy,” and “stubborn mule,” among other things — that it’s obvious Trump is teeing up a villain he can blame if something goes wrong. If inflation does spike, or unemployment rises, or consumers simply remain grim, Trump can say that it’s all Powell’s fault for waiting too long to cut rates and that the Fed chair should have listened to the much smarter president.
Most economists think the Fed’s short-term rates are about where they should be, for now. Virtually nobody is forecasting the kind of doom that would justify urgent, dramatic rate cuts. And there’s broad confidence that the Fed will cut rates if a weaker economy calls for it. Just not at the White House.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
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