Author: Jin Shi Data
US President Trump wants the Federal Reserve to significantly cut short-term interest rates to 1%. Such a rate cut typically only occurs in emergency situations like sudden recessions or financial panics. What exactly is Trump worried about?
Currently, the US short-term policy interest rate is around 4.25%, with a historical average of 4.6%. The Federal Reserve manages inflation and maintains economic health by adjusting interest rates. If inflation eases, the Fed may reduce rates to around 3.5% in the next year.
However, Trump's own tariff policies have become a stumbling block. By imposing new taxes on imported goods, Trump has increased costs for businesses and consumers. Most economists believe these tariffs will push inflation up by about 1 percentage point, from the current 2.4% to 3.5% or slightly higher.
Trump seems unconcerned about inflation, despite promising to "significantly lower prices" during his presidential campaign. For months, he has been urging Powell to cut rates, initially requesting a 1% cut, then 2%, and now even over 3%. Jim Bianco of Bianco Research recently joked on social media: "After July 4th, he might start demanding negative rates."
The Federal Reserve typically cuts rates when it believes inflation is under control and the economy needs stimulation. Lower rates make borrowing cheaper, thereby stimulating spending and investment. Normally, the Fed gradually cuts rates by 25 basis points every few months. But when necessary, the Fed can make aggressive cuts. For example, during the Great Recession from 2007 to 2009, the Fed cut rates by nearly 5 percentage points in 15 months; during the COVID-19 pandemic in 2020, it cut rates by 1.5 percentage points in two months.
Rate cuts exceeding 25 basis points usually indicate economic problems. Trump's requested rate cut is comparable to recession-era cuts. Rick Newman of Yahoo Finance states: "Someone must have told him we're in big trouble."
Trump's economic advisors, including Treasury Secretary Bezos and White House economist Hassett, publicly maintain an optimistic economic outlook—it's their job. But they may share concerns with many economists and investors: the economy appears to be slowing, the job market is weak, national debt is growing to unsustainable levels, and Trump's tariff policies do more harm than good.
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