President Donald Trump is badgering the Federal Reserve to cut interest rates, but even if the Fed gave in to the pressure, it wouldn’t necessarily lead to lower borrowing costs for consumers.
In fact, economists say, Trump’s ongoing attacks on Fed Chair Jerome Powell and his tariff policies could keep the longer-term interest rates that matter for consumers and businesses higher than they otherwise would be. A less-independent Fed can lead, over time, to higher borrowing costs, as investors worry that inflation may spike in the future. As a result they demand higher yields to own Treasury securities.
Trump has repeatedly urged Powell to cut the short-term interest rate that the central bank controls. The Fed typically reduces its rate during an economic downturn to encourage more borrowing and spending, and raises it to cool the economy and fight inflation when prices rise.
But long-term rates on things like mortgages, auto loans, and credit cards are largely set by market forces. And in recent weeks, fears that Trump’s sweeping tariffs could raise inflation, along with the administration’s threats to the Fed’s independence, have led markets to push those longer term rates higher. It’s not clear that the Fed can fully reverse those trends by itself.
“It’s not automatically true that even if the Fed were to cut rates, that you would see a measured decline in long-term interest rates,” Francesco Bianchi, an economist at Johns Hopkins University, said. “This kind of pressure on the Fed might backfire…if markets don’t believe the Fed has inflation under control.”
Trump renewed calls on Wednesday and Thursday for Powell to reduce the Fed’s short-term rate, telling reporters that the chair is “making a mistake” by not doing so.
And last week, Trump suggested he could fire Powell, while a top aide said that the White House was “studying” whether it could do so.
Stock markets plunged in response, the yield on the 10-year Treasury bond rose, and the dollar fell, an unusual combination that suggested investors were selling most American assets. Markets recovered those losses after Trump said on Tuesday that he had “no intention” of firing the Fed chair.
Still, the threats to the Fed’s independence unnerved Wall Street investors, because they see a Fed free from political pressure as critical to keeping inflation in check. An independent Fed can take unpopular steps, such as raising rates, to fight inflation.
“Threatening the Fed doesn’t soothe markets — it spooks them,” said Lauren Goodwin, chief market strategist at New York Life Investments. “And the result is often the opposite of what any administration wants to see: higher rates, weaker confidence, and more market turmoil.”
Since Trump began imposing tariffs in early March, when he slapped duties on Canada and Mexico, the 10-year Treasury yield has risen from 4.15% to about 4.3%. The yield is a benchmark for mortgage rates and other borrowing. Mortgage rates, in turn, have increased during that time, from 6.6% to 6.8%.
While Trump says he is negotiating over tariffs with many countries, most economists expect some level of duties to remain in place for at least this year, including his 10% duties on nearly all imports.
The 10-year yield did fall Thursday when two Federal Reserve officials said that rate cuts are possible as soon as this summer, should the economy falter and unemployment rise.
Yet last fall, longer-term interest rates also fell in anticipation of rate cuts, but then rose once the Fed cut in September and then continued to rise as the central bank reduced its rate again in November — two days after the election — and in December. Mortgage rates are now higher than they were when the Fed cut.
A range of factors can affect longer-term Treasury rates, including expectations for future growth and inflation, as well as the supply and demand for government bonds. Bianchi worries that stubbornly high government budget deficits — which are financed by trillions of dollars of Treasurys — could also lift long-term rates.
Should the Fed cut rates now, llonger-term borrowing costs “would move in the opposite direction, absolutely,” Goodwin said, “because the threat of inflation is so palpable — that move would call their credibility into question.”
Trump said in a social media post this week that there is “virtually No Inflation” and as a result, the Fed should lower its key rate, from its current level of about 4.3%. Many economists expect the central bank will do so this year. But Powell has underscored that the central bank wants to evaluate the impact of Trump’s policies before making any moves.
Inflation has fallen in recent months, dropping to 2.4% in March, the lowest level since last September. Yet excluding the volatile food and energy categories, core inflation was 2.8%. Core prices often provide a better signal of where inflation is headed.
A key issue for the Fed is that the economy is very different now than it was during Trump’s first term. Back then inflation was actually below the Fed’s target. At that time, it was a “no-brainer” to cut rates, Bianchi said, if there was a threat of a recession, because inflation wasn’t an issue.
But now, tariffs will almost certainly lift prices in the coming months, at least temporarily. That raises the bar much higher for a Fed rate cut, Bianchi said.
Still, once there are clear signs the economy is deteriorating, such as a rising unemployment rate, the Fed will cut rates, regardless of what Trump does, economists said.
Trump on Monday accused Powell of often being “too late” with his rate decisions, but ironically the Fed may move more slowly this time because of the threat of higher prices from tariffs. Without clear evidence of a downturn, Fed officials would worry about being seen as giving in to political pressure from Trump if they cut.
“Powell knows the irreparable damage that would occur if it was perceived that he cut because he was forced to by Trump,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income.
The Fed now “will be even more delayed because I think you’re going get more of an inflation lift initially, before you get the more pronounced slowing in growth,” Porcelli said.
Either way it may take more than a Fed cut or two to bring down longer-term borrowing costs, Bianchi said.
“To really lower long-term rates you need to provide a stable macroeconomic environment, and right now we are not there yet,” he added.
This story was originally featured on Fortune.com
