- Trump has said he wants lower interest rates, but he may be standing in his own way.
- The president said he would demand interest rates be lowered at in address to Davos last week.
- 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 Federal Reserve chief 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.
Fed Chair Jerome 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 would demand 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 added 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 the Fed will 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 note that despite Trump’s insistence that rates come down quickly, the Fed can 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 plan to levy steep tariffs on US imports could stoke inflation, a notion that Trump has pushed back on. The president has said he would lower prices, and he implemented tariffs in his first term without a significant inflation increase.
His tariff plan this time around, though, is far more wide-reaching, explaining why 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 in the weeks leading up to 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 have since pulled back as Trump’s pro-growth agenda stoked more risk appetite, but inflation expectations are still up. The one-year expected inflation rate has climbed 40 basis points since October, according to Cleveland Fed data.
The market’s outlook for Fed rate cuts has also dimmed. According to the CME FedWatch tool, 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. The takeaway was: the Fed is in no hurry to cut rates further,” David Morrison, a senior market analyst at Trade Nation, wrote in a note.
Markets have questioned whether Trump, who has said he understands interest rates “much better” than the Fed, will try to influence the central bank in its future rate decisions.
Trump’s allies reportedly created manifesto prior to the election to erode the Fed’s independence. Scott Bessent, Trump’s pick to lead the US Treasury, also floated creating a “shadow Fed Chair” prior to the inauguration, though Trump hasn’t acknowledged that possibility.
