Just two months after President Donald Trump began a brief detente with Federal Reserve Chairman Jerome Powell, he’s ramping up his old pressure campaign. Although Trump has stopped short of reiterating his prior, but since-retracted threat to fire Powell, the president has teased announcing his nominee to replace him long before the beleaguered central bank head’s term expires in 11 months.
Then, in a Truth Social post, Trump called for a major reduction in the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one another overnight. The federal funds rate is an important benchmark in financial markets, influencing a wide range of market interest rates.
Trump wrote that the federal funds rate, which is slightly below the historic average at the 4.25% to 4.5% range, should be slashed to “1% or better.” Trump blasted “Too Late” Powell, and the rest of the central bank.
“If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost,” Trump wrote. “The Board just sits there and watches, so they are equally to blame.”
Trump raises some valid concerns about the proper federal funds rate level. It’s a disagreement economists have debated for years.
But it’s wildly inappropriate for the president to pressure the Federal Reserve Board of Governors members about policy changes he wants to see. After all, independence means that the Fed can maneuver without interference from Congress or the White House, even if politicians aren’t happy with the central bank’s policy choices.
Then there’s the merits of Trump’s argument, or lack thereof. He seemed to incorrectly conflate the benchmark short-term interest rate set by the Fed with the interest rate investors demand to hold U.S. and other debt. That latter rate can be influenced by Fed policy but is also connected to views about the U.S. economy, inflation, geopolitics, and institutional stability.
Powell, on July 1, responded obliquely to Trump’s criticism. The Federal Reserve, Powell said at the European Central Bank’s annual forum in Sintra, Portugal, would have cut interest rates by now if Trump’s tariffs weren’t so substantial.
Trump’s ever-changing tariff agenda has caused months of deep uncertainty for global markets and businesses. Many have struggled to make predictions and plan for duties that have shifted, sometimes with no warning other than social media posts by the president.
Trump can whip Congress, NATO, the Middle East, and global trade delegations the world over into doing his bidding, but the buck stops with the bond market, which has seen higher-than-usual yields, a sign of investor uncertainty, due to the administration’s tariff regime.
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When Trump explains that he would prefer the Fed to ignore the upside risk of inflation for the sake of the White House’s agenda, the bond market sees that as a sign that higher future inflation is far more likely. It’s why the bottom fell out of the bond market and bond yields spiked, a sign that investors lack confidence in the economy, when Council of Economic Advisers Chairman Stephen Miran idiotically claimed the U.S. dollar’s status as the world’s reserve currency was a “burden” — in defiance of the president’s consistent support for the dollar’s dominance. It’s why bond yields spiked again when Trump threatened to fire Powell.
The only way to lower the net interest cost of our national debt is to stop adding trillions of dollars to it every year. Even against the otherwise almighty Trump, the bond market still reigns supreme.