The Case for Interest-Rate Cuts Is Weak. But Trump Is Still Likely to Get Them.

President Donald Trump wants lower interest rates. He’ll get them, but perhaps not where he really needs them. (Getty Images)

President Donald Trump’s unstoppable force of will is likely to triumph over Federal Reserve Chairman Jerome Powell’s immovable object of caution when it comes to lower interest rates.

But the case for cuts is growing harder to make, even as market bets for it harden like cement, and the end result might not deliver what the president truly wants.

From the broadest helicopter view, the world’s biggest economy isn’t in need of extra support. Stocks hit their 17th record high of the year on Wednesday, extending an extraordinary rally that has lifted the S&P 500 nearly 30% from its early April trough.

Risk assets such as Bitcoin and Ether are trading at or near all-time peaks, retail investors are bullish, new tech listings are soaring on new initial public offerings, and small-cap stock gains are outpacing the S&P 500 since the early April trough. House prices are pegged near the highest levels in history.

The job market is cooling, at least according to data from the Bureau of Labor Statistics proper to the firing of the person in charge of collecting it, but the headline unemployment rate is hovering at 4.2%, an historically low level that by no means suggests deep distress in the labor market.

Atlanta Federal Reserve President Raphael Bostic, in fact, told an event in Alabama Wednesday that full employment gives the central bank the “luxury” of waiting on inflation data to determine their next move on rates.

And that is trending higher.

Core consumer prices, which strip away volatile components such as food and energy, rose at an annual pace of 3.1% last month, according to the BLS’s July inflation report.

Economists expect the pass-through of tariffs, which were reset at higher rates earlier this month, to accelerate through the autumn and beyond, and lift consumer prices higher as a result.

“We calculate that the average effective tariff rate on U.S. imports has climbed to 19% this month, from 15% at the end of June,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. “Those additional costs will hit consumers in the fall and winter.”

It’s no better on the factory side, either. Producer prices surged by 0.9% last month, BLS data showed Thursday, and were pegged at an annual rate of 3.3%.

Put simply, the case for lowering interest rates, which investors usually associate with stresses in the domestic economy or slowing inflation pressures, is tissue-paper thin. And yet it’s likely to happen at least three times this year, according to forecasts published Thursday by Goldman Sachs, with more cuts expected in 2026, as well.

The hard conclusion that can be drawn from this paradox is that president Trump’s effort to pressure the Federal Reserve has been a success. And Powell now finds himself in an even less enviable position.

If he doesn’t lead the case for rate cuts, even though the logic for maintaining the current level of policy restriction is sound, it will be seen as an overtly political act. If he does lower rates, he’ll be seen as having bent to the will of the president.

Markets, meanwhile, aren’t providing him with much cover at this point.

Short-term Treasury bond yields, the most-sensitive to interest-rate changes, are trading at the lowest levels in nearly three years in anticipation of a September reduction.

“Believe it or not, there is an unwritten feedback mechanism between the markets and the Fed,” said Mark Malek, chief investment officer at Sibert Financial.

“There are times when the market displays its willingness to accept rate hikes, and there are other times when the market says ‘cut rates, or else,’” he added. “It’s likely to have to relent to the markets for cuts this time.”

But the president’s desire for lower longer-term bond yields, which he sees as helping reduce the cost of government borrowing, may not emerge as cleanly as he imagines.

Last September, when the Fed cut rates by 50 basis points despite inflation pressures that hadn’t been fully tamed, 10-year Treasury note yields rose nearly 90 basis points over the next three months.

Barring an unforeseen surge in hiring, or a massive change in inflation readings, the Fed’s going to cut rates in September. The president, the Treasury, and the markets have effectively ensured they’ll get what they want.

But is it what they really need?

Write to Martin Baccardax at martin.baccardax@barrons.com