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Trump’s Rate Cut Pressure Risks Driving up long-Term Borrowing Costs, Experts warn
WASHINGTON D.C. – A renewed push by former President Donald Trump to pressure the Federal Reserve into lowering interest rates could inadvertently increase long-term borrowing costs for consumers adn the government, economists are warning. While lower short-term rates are often seen as a stimulus, growing concerns about the Fed‘s independence – fueled by Trump’s recent actions and rhetoric – are eroding investor confidence in the central bank’s ability to maintain stable inflation, perhaps leading to higher long-term rates.
the core principle at play is investor expectation. The more investors believe the Fed will succeed at keeping inflation at its 2% target, the lower rates will be on long-term loans. However,a loss of faith in the Fed’s control over inflation could trigger a rise in those rates.
These concerns predate Trump’s presidency. As early as prior to his election, economists ”sounded the alarm” that political pressure on the fed could undermine its independence and credibility. Those anxieties have intensified with Trump’s increasingly vocal demands for rate cuts, most recently demonstrated by his dismissal of Fed Governor Lisa Cook.
“people are paying too high an interest rate,” Trump stated this month during a cabinet meeting. “That’s the only problem with housing. We have to get the rates down a little bit.”
The threat to the Fed’s independence is drawing criticism from across the political spectrum. Michael R.Strain, director of policy studies at the conservative American Enterprise institute, warned in August that “eroding central bank independence will make investors, businesses, and households less confident that the Fed will be able to keep inflation low and stable because they will expect that the president will be able to bully the Fed into keeping interest rates lower than is merited, juicing demand and creating inflationary pressure.” He further explained that “Higher expected future inflation will put upward pressure on long rates.”
Recent history offers a cautionary tale. In late 2024, the Fed cut its benchmark interest rate by a full percentage point over four months, coinciding with a perceived cooling of inflation. Though, yields on 10-year Treasurys and mortgage rates remained largely unchanged. More concerningly, yields on 30-year treasury bonds – a key indicator of investor confidence in the government’s financial stability – have approached 5%, a level not seen as 2006, posing a notable challenge to the federal budget as the Treasury Department bears the cost of higher interest payments.
According to Paul Hilsenrath,a former Fed reporter,the situation could worsen. “The president might get what he wants and get a much lower short-term interest rate,” he said, “But long-term interest rates on federal government debt could increase.”
The potential for politically motivated rate cuts to backfire underscores the delicate balance between economic policy and the preservation of the Fed’s independent authority.
