What is behind Trump's obsession with interest rate cuts: What is he really worried about?

Author: Jin10

President Trump hopes the Federal Reserve will significantly lower short-term interest rates to 1%. Such a reduction usually only occurs in emergency situations like a sudden recession or financial panic. 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 a healthy economy by adjusting interest rates. If inflation eases, the Federal Reserve may lower interest rates to around 3.5% in about a year.

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, from the current 2.4% to 3.5% or slightly higher.

Trump seems to be unconcerned about inflation, even though he promised 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% cut, then 2%, and now even more than 3%. Jim Bianco of Bianco Research recently joked on social media: "After July 4th, he might be asking for negative interest rates."

The Federal Reserve typically lowers interest rates when it believes inflation is under control and the economy needs stimulation. Lower interest rates make borrowing cheaper, thereby encouraging spending and investment. Normally, the Federal Reserve would gradually lower rates, reducing them by 25 basis points every few months. However, when necessary, the Federal Reserve may also implement aggressive rate cuts. For example, during the Great Recession from 2007 to 2009, the Federal Reserve cut rates by nearly 5 percentage points over 15 months; during the outbreak of the COVID-19 pandemic in 2020, the Federal Reserve lowered rates by 1.5 percentage points in just two months.

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

Trump's economic advisers, including Treasury Secretary Mnuchin and White House economist Hassett, publicly maintain an optimistic outlook on the economy—it's their job. But they may share the concerns of 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 policies may have more drawbacks than benefits.

During his two presidential terms, Trump has consistently advocated for lowering interest rates to reduce federal borrowing costs. He often discusses "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. The government, like other borrowers, benefited from the Federal Reserve's aggressive rate cuts in 2020. However, today, the government's average borrowing rate has rebounded to 3.3%, while the federal deficit has ballooned to nearly $2 trillion per year. Annual interest payments on the debt now exceed $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 is expected to exceed $40 trillion. But Trump should understand that soon there will be a president who will have to deal with the consequences of massive national debt, and that person could be him.

On Tuesday, Trump posted on "Truth Social": "Republicans, this 'Beautiful 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 at 68!!!"

There are already signs that the surge in federal debt is shaking the financial markets. The three major 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 excessive debt. This has led to a weakening of the dollar and triggered a trading trend of "selling U.S. assets," making foreign assets more attractive than U.S. assets.

If Trump gets his wish, a significant rate cut would obviously lower the government's borrowing costs. But this does not help solve the fundamental problem: the debt itself is too high, while the extravagant Congress remains indifferent.

Trump may also be worried about the economic slowdown - the GDP showed negative growth in the first quarter. Job vacancies are decreasing, consumer confidence is low (as always), and Americans' concerns about the labor market are growing. If the economy does weaken, the Federal Reserve will undoubtedly lower interest rates at some point, but it will not be as aggressive as Trump demands.

Banking analyst Chris Whalen believes that the Federal Reserve may eventually 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 than fall. This could lead to a stagflation scenario: stagnation in growth, while inflation and interest rates remain high, causing greater dissatisfaction among voters.

Another reason for Trump's radical interest rate stance may be that he is looking for a scapegoat for a possible failure. He frequently attacks Powell, calling him "an idiot," "a fool," and "a stubborn mule," clearly preemptively blaming him for potential future economic problems. If inflation surges, unemployment rises, or consumer sentiment remains low, Trump can say it's all Powell's fault—because he didn't cut rates in time and didn't 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. Hardly anyone predicts a catastrophic scenario 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 behest of the White House.