By AP Economics Writer Christopher Al Gerber
President Donald Trump has disguised the Federal Reserve to cut interest rates, but even if the Fed succumbs to pressure, it doesn’t necessarily lead to reduced borrowing costs for consumers.
In fact, the economists say that the ongoing attack on Trump’s Fed Chairman Jerome Powell and his tariff policy could keep long-term interest rates important for consumers and businesses higher than other ways. A low-independent Fed could lead to higher borrowing costs over time, as investors worry that inflation could potentially skyrocket in the future. As a result, they demand higher yields to own Treasury securities.
Trump repeatedly urged Powell to cut short-term interest rates controlled by the central bank. The Fed usually lowers the rate during an economic recession, promoting more borrowing and spending, cools the economy when prices rise and raises it to combat inflation.
However, long-term rates for mortgages, car loans, credit cards, etc. are primarily set by market forces. And in recent weeks, I fear that Trump’s drastic tariffs could raise inflation and, together with the administration’s threat to Fed’s independence, have led the market to increase those long-term fees. It is not clear that the Fed can completely reverse these trends.
“Even if the Fed cuts interest rates, it’s not automatically true that we’ll see a measured decline in long-term interest rates,” said Francescobianchi, an economist at Johns Hopkins University. “This kind of pressure on the Fed may be a backfire… if the market doesn’t believe the Fed is under control.”
Trump updated his phone call on Wednesday and Thursday to help Powell lower the Fed’s short-term rate, telling reporters that the chair is “make a mistake” by not doing so.
And last week, Trump suggested he could fire Powell, but the top aide said he was “studying” whether the White House could do so.
The stock market plummeted accordingly, with 10 years of Treasury bond yields rising and the dollar fell, an unusual combination that suggests investors are selling most of American assets. The market recovered those losses after Trump said Tuesday he had no intention of firing the Fed chair.
Still, the threat to the Fed’s independence denied Wall Street investors. The independent Fed can take unpopular measures such as raising fees to combat inflation.
“Threatening the Fed won’t soften the market — it will surprise them,” said Lauren Goodwin, chief market strategist at New York Life Investments. “And the outcome is often the opposite of what any administration wants to see.
Since Trump began smashing tariffs when slapping duties in Canada and Mexico in early March, his 10-year financial yield has risen from 4.15% to about 4.3%. Yields are benchmarks for mortgage fees and other borrowings. Mortgage rates have increased from 6.6% to 6.8% during that time.
Trump says he is negotiating tariffs with many countries, but most economists expect to maintain some duties this year, at least this year, including a 10% mandate on almost all imports.
The 10-year yield fell on Thursday when two Federal Reserve officials said interest rate cuts could be made immediately if the economy intensifies and unemployment rises.
However, long-term interest rates also fell last fall in anticipation of interest rate cuts, but continued to rise after the Fed was cut in September, and as the central bank again dropped that rate two days after the election, and in December. Mortgage fees are higher than when the Fed cut.
A variety of factors can affect long-term financial ratios, including future growth and inflation expectations, as well as demand and demand for government bonds. Bianchi worries that a stubbornly high government budget deficit (funded by the trillion dollar Treasury ministry) could also raise long-term interest rates.
If the Fed is cut now, Llonger-Term’s borrowing costs will “become in the opposite direction,” Goodwin said, “The inflation threat is so obvious that the move would question their reliability.”
In a social media post this week, Trump said there was “virtually no inflation,” and as a result, the Fed should lower its key rate from around 4.3% of its current level. Many economists hope that central banks will do so this year. However, Powell emphasizes that he wants to assess the impact of Trump’s policies before the central bank moves.
Inflation has declined in recent months, falling to 2.4% in March, the lowest level since last September. However, excluding the volatile food and energy categories, the core inflation rate was 2.8%. Core prices often provide a better signal of where inflation is heading.
The key issue with the Fed is that the economy is now very different during Trump’s first term. At the time, inflation was actually below the Fed’s target. Inflation wasn’t the issue at the time, so if there was a recession threat, it was “easy” to cut interest rates, Bianchi said.
But now, tariffs will almost certainly raise prices in the coming months, at least temporarily. This will result in much higher bars due to Fed rate reductions, Bianchi said.
Still, with clear indications that the economy is getting worse, such as rising unemployment, the Fed will cut interest rates regardless of what Trump does, the economist said.
Trump on Monday accused Powell of “too slow” in his rate decisions, but ironically, the Fed may move more slowly this time due to the threat of tariff prices increasing. Without clear evidence of a recession, Fed officials will be worried that if they are cut, they will be seen succumbing to political pressure from Trump.
“Powell knows the irreparable damage that occurs if he is perceived as being cut off because he was forced by Trump,” said Tom Polcelli, chief economist at PGIM bonds.
The Fed is “still lagging further because I think that inflation lifts will increase at first before growth slows,” Porcelli says.
Either way, Bianchi said it could take one or more Fed cuts to reduce long-term borrowing costs.
“To reduce the very long-term rates, we need to provide a stable macroeconomic environment. We are not there yet at the moment,” he added.
Original issue: April 25th, 2025, 3:08pm EDT
