US president Donald Trump claims to have a “straightforward” style of deal-making: aim high and “keep pushing and pushing and pushing” until he wins.
Unfortunately for the Federal Reserve, Trump’s 'liberation day' tariffs may get him what he wants.
Since the early days of Trump’s second stint on Pennsylvania Avenue, he has repeatedly demanded that Federal Reserve chair Jerome Powell cut the Federal Funds rate.
Just three days after Trump’s inauguration in January, the self-proclaimed interest rates expert told delegates at the World Economic Forum that he would “demand that interest rates drop immediately” in the US.
Trump renewed that call last week after inflicting tariffs on nearly every US trade partner that have clobbered markets. Even the penguins of Heard Island and the McDonald Islands were not safe from his edict.
“CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS,” Trump posted on his Truth Social platform last Friday as equity indices plummeted. Then on Monday morning, he said “the slow-moving Fed should cut rates” because there is “NO INFLATION”.
Treasury secretary Scott Bessent has said he and Trump care more about bond yields than share prices. They are the basis for mortgage rates, which matter hugely to American householders.
Trumping the Fed
Now it looks like Trump might get his wish. When he took up the presidency on January 20, researchers at Rabobank said two cuts to the Fed's target rate had been priced in this year, but one looked likely.
As of Monday’s close, the market has priced in five rate cuts, according to CME’s FedWatch tool.
Of course, plotting a path for rates through the tariff storm is not as straightforward as Trump seems to believe, especially with stagflation on the horizon.
Sure, if the tariffs hit US productivity and growth — which they will, more than likely — cutting rates to get the US economy going would make sense.
And in the wake of 'liberation day', the US is facing a recession. Investment banks across the board have revised their probabilities of a downturn upwards. On social media, the return of skinny jeans, indie sleaze and Lady Gaga also indicate a looming economic slump (apparently).
Unfortunately for Trump, there is still inflation in the US — the Personal Consumption Expenditures Index and the Consumer Price Index are both above the Fed’s 2% mandate.
And as tariffs are set to send the cost of imported goods spiralling up, inflation will probably climb — possibly for a long time. In a speech on Friday, Powell warned that while “tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent”.
Central Banking 101 states that persistent and sticky inflation is not conducive to rate cuts, which leaves Powell in a tricky place — especially if all this comes to a head amid a recession.
Powell said last week that the Fed is not in a rush to respond to Trump’s latest round of isolationist policies. But by pricing in more and more rate cuts, the market appears to expect Powell will prioritise stimulating the US economy over controlling inflation.
For now, the market has to hope Powell chooses wisely. But when it comes to the path of rate cuts, there’ll be one winner for sure — Donald J Trump.