- Trump has said he wants lower interest rates, but he may be standing in his own way.
- The president said last week that he would demand that interest rates be lowered.
- His policies, though, are an obstacle the Fed could have to navigate as it adjusts monetary policy.
President Donald Trump has called for interest rates to come down and escalated his criticism of the Federal Reserve chair, Jerome Powell, after this week’s policy meeting.
But the president himself may be the biggest obstacle to lower borrowing costs, as his policies risk exacerbating an issue he campaigned on fixing: rising prices.
Powell sent a clear message this week that central bankers were in no rush to lower rates, with Fed officials opting to pause rate cuts in the first policy meeting of the year.
That seemed to defy pressure from Trump, who said in his address to the World Economic Forum last week that he’d demand that interest rates be lowered “immediately.”
“Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing,” Trump wrote on Truth Social after Wednesday’s rate decision.
He argued that his policies — including plans to levy steep tariffs on imports from China, Canada, and Mexico — could help renew the US economy.
But those plans could end up being the very obstacle the Fed has to navigate this year as it decides what to do with interest rates, and they’re likely the reason it’ll hit pause until the picture becomes clearer, Wall Street forecasters say.
“The reality is that the Fed is simply trying to respond to the data and the new administration’s policies as they unfold,” Seema Shah, the chief global strategist at Principal Asset Management, said in a note. “At times like these, when government policy — particularly tariff policy — is so uncertain, they do not have a forecasting edge. Keeping policy rates on hold until a clear direction starts to emerge is sensible.”
Others said that, despite Trump’s insistence that rates come down quickly, the Fed could afford to take its time after cutting at a brisk pace in the final stretch of 2024.
“After cutting rates by 100bps last year, even though the economy was generally in good shape, the Fed can now afford to be patient while it evaluates the economic impact of policy changes under the Trump administration,” Paul Mielczarski, the head of global macro strategy at Brandywine Global, said. “Meanwhile, broad-based tariffs would have a meaningful impact on goods inflation at a time when core inflation is still above 2%.”
Economists have warned that Trump’s tariff plans could stoke inflation, a notion that Trump has pushed back on. The president has said he’ll lower prices, and he implemented tariffs in his first term without a significant increase in inflation.
His tariff plans this time around, though, are far more wide-reaching, and forecasters are more worried about a resurgence of inflation in his second term.
The Fed is also working with a strong economy, and the administration is making more pro-growth plans. Lowering rates in a high-growth economic scenario also risks stoking fresh inflationary pressures.
Bond yields spiked ahead of Trump’s inauguration, a sign that investors were weighing inflation risks tied to the president’s economic plans and were anticipating higher interest rates.
Yields pulled back as Trump’s pro-growth agenda stoked more risk appetite, but inflation expectations are still up. Data from the Cleveland Fed indicates the one-year expected inflation rate has climbed by 40 basis points since October.
The market’s outlook for Fed rate cuts has also dimmed. The CME FedWatch Tool suggests investors are pricing in an 82% chance the Fed will keep rates level in March, up from a 48% chance a month ago.
Investors are also pricing in a 57% chance rates will remain unchanged through May, up from 37% last month.
“The bottom line was repeated in various forms by Mr Powell during his appearance,” David Morrison, a senior market analyst at Trade Nation, wrote in a note. “The takeaway was: the Fed is in no hurry to cut rates further.”
Markets have questioned whether Trump, who has claimed he understands interest rates “much better” than the Fed, will try to influence the central bank in its future rate decisions.
Before the election, Trump’s allies were said to have created a plan to erode the Fed’s independence. Scott Bessent, Trump’s pick for treasury secretary, also floated creating a “shadow Fed chair,” though Trump hasn’t acknowledged that possibility.
