President Donald Trump keeps demanding the Federal Reserve slash its policy rate to 1%, but analysts say the cut is impractical and would likely backfire. The Fed, under new chair Kevin Warsh, raised rates last week instead, even as Trump's approval on cost-of-living issues sinks ahead of the midterms.
A rate cut analysts call "cataclysmic"
Trump wants the Fed to move its policy rate to 1% from its current range of 3.75% to 4%. Analysts say the three-percentage-point drop would likely touch off massive dislocation in the global financial system and leave the US government paying more to borrow than it does now. According to Reuters, J. Benson Durham, founder of DASM investment research firm, said a three-point cut "seems cataclysmic."
Durham said Treasury rates would climb as investors priced in higher inflation, and that countries like Germany could pull in capital by offering just slightly more than the US to lenders. He added that the dollar would drop sharply as a result.
Fed hikes instead, as inflation stays elevated
Rather than cutting, the Fed under Warsh raised rates last week for the first time in three years, in a unanimous rate hike vote. Trump said he had told Warsh beforehand to go along with the majority if necessary, though Warsh has said he won't discuss conversations with the president.
The Fed's preferred inflation measure was 3.7% in July, and the central bank doesn't expect it to fall to its 2% target before 2029. Some figures close to Trump say his rate demands are less a serious prescription than a way to deflect from high consumer prices ahead of the November midterms.
Political pressure builds ahead of the vote
Trump's pressure on the Fed extends beyond the rate request. He aims to oust Governor Lisa Cook, an appointee of former President Joe Biden, and is awaiting the results of an inspector general's probe into former Chair Jerome Powell's oversight of a Fed construction project.
Mortgage rates are nearing 7%, and prices for staples like ground beef and gasoline are also rising. A Reuters/Ipsos poll published Monday showed just 17% of respondents approve of Trump's handling of the cost of living, the top issue Americans say will shape how they vote in six weeks.
Trump has so far spared Warsh the harsh public epithets he once aimed at Powell over rate-cut pressure. Warsh, by contrast, appears to have a more congenial relationship with the White House while maintaining he remains an independent broker on monetary policy.
Sources: Investing.com, Reuters via Yahoo Finance
Trading involves risk.
Risk Disclaimer
