Trump's Interest Rate Demands Meet Skepticism from Analysts and Markets
US President Donald Trump has once again urged the Federal Reserve to cut interest rates to 1%, but analysts say this demand is unrealistic and could backfire. The Fed just raised interest rates by 25 basis points last week to 3.75%-4.00% and signaled further policy tightening, despite Trump's criticism of the decision.
The Fed has generally supported continued rate hikes to curb inflation, which remains persistently high. Analysts believe that sharply lowering the current policy rate range to around 1% would trigger severe turmoil in the global financial system, causing U.S. government financing costs in the bond market to rise rather than fall.
J. Benson Durham, founder of investment research firm DASM, said cutting rates by about 3 percentage points to around 1% 'would seem to bring catastrophic consequences.' He believes that investors would price in higher inflation expectations, leading U.S. Treasury yields to move higher and the dollar could fall sharply.
The mechanisms of the bond market and concerns about the Federal Reserve's credibility are worrying, but Trump has repeatedly demanded a substantial reduction in borrowing costs. Some people close to Trump believe his demand is less a specific policy proposal than an effort to shift public dissatisfaction over issues such as high prices partly onto the Federal Reserve.