Trump Keeps Pushing Powell to Lower Interest Rates. It Could Backfire.

Fed Chair Jerome Powell in Washington. President Trump says Powell’s refusal to lower rates is resulting in “hundreds of billions of dollars being lost!” (Al Drago/Bloomberg)

The King of Debt, as President Donald Trump once dubbed himself, wants interest rates to fall. That’s hardly a surprise—nearly every other occupant of the White House favored lower borrowing costs.

Trump, however, has a big, beautiful reason to push for lower rates. That’s the steadily rising interest expense on the national debt, which has surpassed defense expenditures and is set to top $1 trillion. It’s a major factor in the budget deficit projections of as much as $4 trillion over its already ascending trajectory following the recent passage of the big tax bill.

But he may be no more successful than King Canute was in holding back the tide. Trump’s calls for cheap money could backfire, possibly pushing bond yields higher. And his attacks on the independence of the Federal Reserve could further harm the dollar’s status as the preeminent international reserve currency, making credit even dearer rather than cheaper.

As with so many things, Trump defied convention by letting loose with barrages of public and highly personal insults aimed at Jerome Powell, calling the Fed chair “not a smart person,” “stupid,” and simply “too late” for not cutting the central bank’s policy interest rate as promptly as he has desired.

The president’s acolytes in the administration and Congress have upped the accusations against Powell, slamming him for alleged mismanagement for things ranging from renovations to the Fed’s Washington headquarters to losses on the central bank’s bond portfolio and its payment of interest on reserves.

Presidents since Harry S. Truman have leaned on the Fed for low interest rates. An accord between the Treasury and the central bank in 1951 ended a cap on government bond yields set to help the U.S. finance World War II, freeing the Fed to raise rates to curb postwar inflation. In the 1960s, President Lyndon Johnson literally manhandled William McChesney Martin for hiking rates during the Vietnam War, thus complicating LBJ’s guns-and-butter policies.

Most famously, President Richard Nixon pushed Arthur Burns, his handpicked Fed chief, to run a loose monetary policy to ensure a hot economy ahead of the former’s 1972 reelection campaign. Inflation then was artificially suppressed by wage-and-price controls announced on Aug. 15, 1971. At the same time, Nixon also ended the dollar’s last linkage to gold, suspending foreign monetary authorities’ right to redeem greenbacks at the $35-an-ounce price, which was fixed under the Bretton Woods agreement that established the postwar international monetary order. The ultimate result was stagflation, the signal economic aspect of the doleful decade of the 1970s.

Notwithstanding this history, Trump thinks the U.S. deserves to have the lowest interest rates in the world, which he illustrated in a handwritten note listing central bank rates around the globe. That’s because the president still thinks like a real estate developer, Jim Bianco, founder and eponym of Bianco Research, said in a webinar this past week. The best private borrowers may get the cheapest rates, but that’s not how it works for sovereign debtors, which will never default since they can always pay their debts with “worthless pieces of paper.”

By his criterion, Trump thinks the Fed should cut its target for federal funds, currently in a range of 4.25% to 4.50%, by as much as three percentage points. That would bring down the U.S. central bank’s policy rate closer to the 0.25% of Switzerland (which has to counter an overly strong Swiss franc) or Japan’s 0.5% and Cambodia’s 0.45%, low rates that Bianco points out are reflective of weak economies.

The U.S. economy, by contrast, continues to chug along, with a 4.1% jobless rate in June, below what the Fed’s Summary of Economic Projections sees as long-run full employment, while inflation remains above its 2% target. The central bank has a dual mandate of maximum employment and low inflation. While the former has been achieved, the latter is still wide of the mark, at 2.7% year over year, based on the personal consumption expenditures price index, excluding food and energy, the Fed’s favored guide to inflation trends.

The Fed has resisted the president’s entreaties because it is waiting to see the full impact of the tariffs he has announced but seemingly changes continually. In the past week, the July 9 deferral of the April 2 Liberation Day levies was extended to Aug. 1, which allowed equity markets to exhale a sigh of relief and major indexes to scale record highs. Meanwhile, Trump also set 50% levies on copper and imports from Brazil, plus 35% on certain goods from Canada not covered by the U.S.-Mexico-Canada Agreement, also starting Aug. 1.

There’s no telling what new tariffs may be added, or rescinded, by the time you read this. Nor what the impact on prices may be, given importers and their customers rushed to beat the well-anticipated Liberation Day. Minutes of the June Fed policy meeting, released this past week, revealed a split between those who thought tariff-related price hikes would be a one-and-done deal and those who worried there would be a more sustained inflation impact.

If there isn’t an inflation uptick from tariffs, Fed governors Christopher Waller and Michelle Bowman have indicated their willingness to consider a rate cut as soon as the next policy meeting at the end of July. Fed-funds futures are pricing in the first quarter-point reduction in September, according to the CME FedWatch site, with another in December, which is in accord with the Fed’s SEP. These Fed governors are both Trump appointees; Waller is also prominently mentioned as a possible Powell successor.

Current betting odds have Kevin Hassett, director of the National Economic Council, as the leading contender for the Fed chair, Bianco said, pulling ahead of previous front-runner Kevin Warsh, a former Fed governor and son-in-law of Ronald Lauder, heir to the Estée Lauder fortune and a longtime Trump friend. Treasury Secretary Scott Bessent also is seen in contention, although he said he has “the best job” in Washington, adding he would be “happy to do what President Trump wants me to do.”

In this horse race, “the real loser here is not Jay Powell but his successor,” TS Lombard economist Dario Perkins wrote in a client note this past week. “We don’t even know who that person is, and already there are strong doubts about their integrity and what sort of ‘deal’ they have made to secure the position. But it seems pretty clear that Powell’s replacement will come with a ‘tacit understanding’ to cut rates.”

That’s because Trump insists Powell’s refusal to lower rates is resulting in “hundreds of billions of dollars being lost!” Yet cutting the Fed’s funds rate target can have perverse effects, as when the central bank lowered short-term rates by a full percentage point late last year while the benchmark 10-year Treasury yield rose by that much. The bond market saw the risk from the rate cuts while inflation was above target amid full employment.

Ironically, Hassett co-wrote an article in 2009 while at the conservative-leaning American Enterprise Institute warning that one means to reduce “government indebtedness” was through “a policy of high inflation,” according to a blog post by Joseph Carson, former chief economist at AllianceBernstein. Inflation helps debtors by letting them repay their obligations in debased dollars. But Hassett’s piece also said the bond market would be expected to push up longer-term rates to compensate for the risk of inflation.

Desmond Lachman, another co-author of that 2009 AEI piece, this past week asserted on Project Syndicate that Trump’s policies risk ending the U.S.’s “exorbitant privilege” of having the world’s leading reserve currency. The Big Beautiful Bill expands the budget deficit beyond 6.2% of gross domestic product, while the administration risks inflation with the highest tariffs in 100 years as it leans on the Fed to cut rate cuts.

“The problem for Trump is that, unlike politicians, markets cannot be pressured or primaried,” Lachman wrote. “If he refuses to heed investors’ warnings, as seems likely, the U.S. should brace for a dollar and bond-market crisis in the run-up to next year’s midterm election. The days of the world letting America live beyond its means are rapidly coming to an end.”

Then the King of Debt’s campaign for cheap money from his designated Fed head is apt to make things worse.

Write to Randall W. Forsyth at randall.forsyth@barrons.com