Interest Rates Pose a Challenge to Trump's Second Term Agenda
Three weeks into his second presidential term, Donald Trump faces a significant hurdle in high interest rates. Despite his efforts to influence financial policy, markets remain unaffected, and stubbornly high rates could become a major obstacle to his plans.
Trump's Frustration with the Federal Reserve
Trump has repeatedly criticized the Federal Reserve, led by Chairman Jay Powell, for not lowering interest rates. He blames the Fed for failing to prevent inflation during his first term and for neglecting to cut rates at a recent meeting.
Market Influence on Interest Rates
While the Federal Reserve sets short-term interest rates, long-term rates are largely determined by market forces. Since September 2022, long-term rates have risen despite the Fed's rate cuts. Investors are concerned about future inflation, fueled by price increases in housing, childcare, and avian flu-induced egg price increases. They also anticipate that Trump's tariffs will lead to higher prices.
Trump's Tariffs and Their Inflationary Impact
Despite concerns, Trump continues to impose tariffs on imports from China, steel, aluminum, Mexico, and Canada. These tariffs are intended to protect American businesses, but critics argue they will inevitably lead to higher prices.
Limited Options for Trump
Trump has limited control over long-term interest rates and few options to address high inflation. Lowering short-term rates could exacerbate inflation, while controlling credit card interest rates could impact bank profits and access to credit.
Potential Retaliation from Foreign Countries
Other countries may use higher interest rates against the United States in retaliation for Trump's tariffs. Foreign holders of US debt could sell their Treasury holdings, driving up US interest rates and increasing borrowing costs for the entire economy.
Unpredictability amidst Market Resistance
Trump's history of getting his way politically may not hold true in the face of the unyielding market. It remains unclear how he will respond to continued market resistance, particularly as he faces an upcoming election.