Behind Trump's Obsession with Interest Rate Cuts: What Exactly is He Worried About?

Author: Jin10

President Trump hopes the Federal Reserve will significantly lower short-term interest rates to 1%. This level of rate cut usually occurs only in emergency situations like sudden recessions or financial panics. What exactly is Trump worried about?

Currently, the short-term policy interest rate in the United States is about 4.25%, while the historical average is 4.6%. The Federal Reserve manages inflation and maintains economic health by adjusting interest rates. If inflation eases, the Federal Reserve may lower the interest rate to around 3.5% in the next year or so.

However, Trump's own tariff policy has become a stumbling block. By imposing new taxes on imported goods, Trump has increased costs for businesses and consumers. Most economists believe that these tariffs will push inflation up by about 1 percentage point, rising from the current 2.4% to 3.5% or slightly higher.

Trump seems to be unconcerned about inflation, despite his promise to "significantly lower prices" during his presidential campaign last year. For months, he has been urging Powell to cut rates, initially asking for a 1% reduction, then 2%, and now even more than 3%. Jim Bianco of Bianco Research recently joked on social media, "After July 4th, he might start demanding negative interest rates."

The Federal Reserve usually lowers interest rates when it believes inflation is under control and the economy needs stimulation. Lower rates make borrowing cheaper, which in turn stimulates spending and investment. Normally, the Fed will gradually lower rates, reducing them by 25 basis points every few months. However, when necessary, the Fed will also cut rates aggressively. For example, during the Great Recession from 2007 to 2009, the Fed lowered rates by nearly 5 percentage points over 15 months; during the sudden recession caused by the COVID-19 pandemic in 2020, the Fed cut rates by 1.5 percentage points in just two months.

A rate cut of more than 25 basis points usually indicates that something is wrong with the economy. The rate cut requested by Trump is comparable to those during a recession. Yahoo Finance's Rick Newman stated, "Someone must have told him that we are in big trouble."

Trump's economic advisors, including Treasury Secretary Mnuchin and White House economist Hassett, openly hold an optimistic view of the economy—that is their job. But they may be worried like many economists and investors: the economy seems to be slowing down, the job market is weak, national debt is growing to unsustainable levels, and Trump's tariff policy may do more harm than good.

During his two presidential terms, Trump advocated for lowering interest rates to reduce federal borrowing costs. He often talked about "refinancing" government debt, a tactic he frequently used as a real estate developer.

In recent years, relatively low interest rates have caused the average interest rate on government debt to drop from 5% in 2007 to 1.6% in 2022. Like other borrowers, the government benefited from the Federal Reserve's aggressive rate cuts in 2020. However, today, the government's average borrowing rate has rebounded to 3.3%, and the federal deficit has ballooned to nearly $2 trillion per year. Annual interest payments on the debt have now exceeded $1 trillion, making it the second-largest federal expenditure item after Social Security.

Trump is not a fiscal hawk. The tax cut bill he is pushing through Congress will add about $4 trillion to the national debt, and by the end of this decade, the total debt will certainly exceed $40 trillion. But Trump should understand that soon there will be a president who will have to deal with the consequences of this massive national debt, and that person could very well be him.

On Tuesday, Trump posted on "Truth Social": "Republicans, this 'Beautiful Big Bill' may be the greatest and most important bill in history, providing the largest tax cuts and border security ever, creating millions of jobs, increasing military spending and veterans' benefits, and more. If this bill fails to pass, it will result in the largest tax increase in history of 68!!!"

There are already signs that the surge in federal debt is shaking financial markets. The three major credit rating agencies have all downgraded the U.S. credit rating. This year, long-term interest rates are higher than they should be, which is a typical manifestation when the market cannot absorb too much debt. This has led to a weakening of the dollar and triggered a trading trend of "selling American assets," making foreign assets more attractive than American assets.

If Trump gets his way, a significant interest rate cut would clearly lower the government's borrowing costs. However, this does not help to address the fundamental issue: the debt itself is too high, while the extravagant Congress remains indifferent.

Trump may also be worried about the economic slowdown - negative growth in GDP in the first quarter. Job vacancies are decreasing, consumer confidence remains low (as always), and Americans' concerns about the labor market are intensifying. If the economy truly weakens, the Federal Reserve will undoubtedly lower interest rates at some point, but it will never be as aggressive as Trump demands.

Banking analyst Chris Whalen believes that the Federal Reserve may ultimately lower short-term interest rates from the current 4.25% to 3%. However, he also thinks that due to the additional deficit spending brought about by the Trump tax cuts, long-term rates for mortgages and other consumer and commercial loans are more likely to rise rather than fall. This could lead to a stagflation scenario: stagnant growth, while inflation and interest rates remain high, causing greater dissatisfaction among voters.

Another reason for Trump's radical rate stance may be that he is looking for a scapegoat for a possible failure. He frequently attacks Powell, calling him an "idiot," "fool," and "stubborn mule," clearly laying the groundwork to blame him for potential economic problems in the future. If inflation soars, unemployment rises, or consumer sentiment remains low, Trump can say it's all Powell's fault—because he did not cut rates in time and did not listen to the advice of the "smarter president."

Most economists believe that the current short-term interest rates set by the Federal Reserve are at a reasonable level. Virtually no one predicts a catastrophic situation that would require an urgent and drastic rate cut. There is a general belief that if the economy weakens further, the Federal Reserve will take action—but it will never act at the request of the White House.