Trump's Increasing Frustration with Interest Rates
Despite President Trump's progress in securing Cabinet appointments, deregulation, deportation, and dismantling the federal bureaucracy, his top priority of substantial tax cuts faces congressional hurdles. However, one aspect of his agenda remains elusive: interest rates.
Trump has repeatedly expressed his displeasure with interest rates, posting on social media that they should be lowered. Markets have not aligned with this view, and unlike political opponents, cannot be bullied into submission. Persistent high interest rates could hinder Trump's second term ambitions.
The Federal Reserve's Influence
The Federal Reserve sets short-term interest rates that primarily impact banks. Trump has criticized Fed Chair Jay Powell for failing to prevent the high inflation of 2022 and for not reducing rates at their January meeting.
Long-Term Rates and Inflation Concerns
Consumers and businesses are more concerned with long-term rates, such as those on mortgages, car loans, and business loans. Typically, long- and short-term rates move together, allowing the Fed some influence over borrowing costs. However, long-term rates, represented by the yield on the 10-year Treasury bond, have risen by approximately one percentage point since September 2022, despite the Fed's short-term rate cuts.
The bond market's rise in long-term rates reflects concerns over future inflation. These concerns are evident in consumer surveys, which indicate that consumers anticipate higher inflation in the coming years.
Tariffs and Inflation
Higher inflation could result from persistent price hikes in areas such as housing, insurance, and childcare, as well as rising egg prices due to avian flu. While Trump has limited influence over these factors, he could address concerns over price increases caused by his tariffs.
Trump's Demands and the Fed's Autonomy
Despite his demand for lower interest rates, Trump lacks direct control over the Federal Reserve. Fed Chair Powell has remained impervious to political pressure.
Long-Term Rates and Trump's Irascibility
Long-term rates remain largely beyond Trump's control, which could exacerbate his frustration. Rising inflation could further elevate these rates, as investors seek higher returns to protect against currency depreciation. Forecasters anticipate the 10-year Treasury rate to remain around 4.5% for the next one or two years.
Trump's Options
Analysts speculate on potential actions Trump could take in the face of interest rate resistance. Some suggest he may push for government intervention in interest rate capping, starting with credit card balances. This could impact bank profits and restrict lending, particularly to higher-risk borrowers.
Economic Weaponization of Interest Rates
Experts caution that foreign holders of US debt, such as Japan and China, could retaliate against Trump's trade wars by selling their Treasury holdings. This would increase US rates and raise borrowing costs throughout the economy.
Conclusion
While lower interest rates might pacify Trump, the market's resistance raises concerns about his reaction. As Trump accustoms himself to getting his way, his response to market defiance remains uncertain.