Trump is calling for a cut in the Fed rate that goes against Powell’s move
The Federal Reserve held interest rates on the benchmark on June 18th unchanged, opposing President Trump’s demands for immediate cuts despite increased political pressure.
Cheddar
President Donald Trump has relied on a variety of debates in his months-long campaign to cut interest rates by Badger Federal Reserve Chairman Jerome Powell.
He points to a report showing two percentage points cuts from the European Central Bank interest rates and weakening private sector employment growth.
Most recently, he cited the claim that the Fed’s refusal to cut its important rates would pay the federal government debt by paying interest payments of hundreds of billions of dollars a year.
Is Trump correct? Analysts say lower fees are likely to save government money in the short term. But that comes with some major warnings.
What does Trump say about the Fed rate?
This week on his Truth Social Site, Trump shared a handwritten note he wrote to Powell. “As usual, you’re too late,” he wrote. “You’ve sacrificed a lot of money to the US and you’re continuing to do that. You need to cut your interest rates significantly! You’ll lose hundreds of billions of dollars! There’s no inflation.”
Attaching a list of central bank interest rates, Trump drew two arrows pointing to interest rates between Japan’s 0.5% and 1.75% shared by Denmark, Seychelles and Thailand. It suggests that Trump believes the Fed should cut its main short-term interest rates by a whopping 3 percentage points, from the range of 4.25% to about 1.25%.
Last week, calling Powell a “silly guy” and “Trump hatred,” the president said the government would save $900 billion a year on interest payments with a three-point rate cut.
What happens when the Fed cuts interest rates?
“We’re a leader in financial markets analysts at Oxford Economics,” said John Canavan, who is leading financial markets analyst at Oxford Economics.
“Perhaps lower fees will save government money,” added Mike Puglise, senior economist at Wells Fargo.
But Trump appears to be exaggerating his savings, said Gubengha Ajiroa, the Centre’s chief economist on budget and policy priorities.
What are the main tasks of the Federal Reserve?
The Fed is an independent institution, and its job is not to lower interest rates and lower borrowing for the federal government, Canavan and Pugliese said.
Under two Congressional orders, the central bank will cut fees to reduce borrowing costs for Americans, strengthening the economic downturn. To increase the rates, or keep them high.
How much has the Fed cut interest rates?
The Fed cut its key rates by percentage late last year after pandemic-related inflation spikes have been eased but has since suspended.
In testimony before Congress in late June, Powell agreed that the Fed’s priority inflation measures, now 2.3%, had approached its 2% target. But he said Trump’s tariffs are expected to cause “meaningly increased inflation” in the coming months, and authorities want to wait and see how it unfolds before reducing fees again.
Aside from the Fed’s mission, it’s reasonable to wonder whether a decline in Fed rates exceeds $36 trillion to the government will save a lot of money. Trump’s “big and beautiful” budget bill is projected to add $3.3 trillion to Red Ink, according to the Congressional Budget Office.
It is not clear how Trump came up with $900 billion, and a White House spokesman did not reply to an email asking for an explanation.
But Trump told Fox News on June 29 that the government must refinance its $9 trillion debt this year. The total annual payments for all Treasury obligations are projected to grow to around $1 trillion in fiscal year 2026, according to the Responsible Federal Budget Commission.
Axel Funhoff, a corporate finance professor at Belgium’s Antwerp Management School, wrote in an article earlier this year on Linkedin earlier this year that the US issued debt could add interest rates that have risen significantly to the government by taking just $9 trillion, a massive increase in interest rates that have risen since the US was first issued.
This suggests that if the US Treasury cuts its key rate by 3 percentage points, the US Treasury could save more than $100 billion a year. But it’s a massive cut, and the economy is generally stable, much larger than point-drop personnel who estimate that by 2027 they will gradually be approved through quarterly point reductions.
Also, large-scale interest rate cuts can have unintended consequences for US debt costs.
How does interest rates affect borrowing costs?
The Fed’s benchmark interest rate is short-term interest rate, so the maximum year terms will affect short-term assets such as Treasury bills, Canavan said. So a quarter-point Fed rate cut would likely have a similar impact on such a Treasury bill, he said.
However, while only about 20% of the Treasury’s outstanding obligations are in such short-term securities, almost all new obligations are short-term due to high long-term interest rates, Canavan said.
More than half of the obligations are 2-10-year Treasury debt, he said, with the remainder being long-term securities, variable-rate debt and other assets for up to 30 years. These securities will be affected by Fed rate movements as they affect investors’ expectations regarding future Fed actions, Canavan said.
But only in part. Because investors hold these assets for a long period of time, they are primarily affected by factors such as economic outlook, inflation expectations, the size of the federal deficit, and investors’ trust in the Treasury Department as a safe and reliable investment.
“If the market determines that the US Treasury’s Trump is cutting too much,” Canavan said, meeting the lower US Treasury borrowing costs, investors are likely to worry about future inflationary spikes and demand higher fees to lend government money. Otherwise, inflation could erode the value of their bonds, he said.
In that case, he said, “there could be a rise in long-term fees,” despite the Fed’s lowering its short-term rate.
In other words, by questioning the Fed’s independence to investors, Trump’s demand for interest rate cuts could have the consequences he most wished for, assuming he acquiesced to the plea.
“Monetary policy only works if the Fed is reliable,” Ajiilore said.
Canavan said government savings due to short-term fee drops (which must be refinanced more frequently) are hard to say more than offset losses from rising long-term rates.
Pugliese said it is likely that the US Treasury will still be coming out soon. But “it’s probably going to cost you money in the long run,” he said.
In contrast, if the Fed cuts the rate twice this year and twice as expected by authorities in 2026, investors will be sure that inflation is easing and that staff is in motion, not because of political pressure.
The result is lower short-term and long-term rates and lower government interest payments.
