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As the Federal Reserve considers whether to reduce interest rates, pressure from President Trump might actually keep them higher.
The Fed’s Open Markets Committee meets on July 29 and July 30 as Fed Chairman Jerome Powell has resisted urging from the president to cut rates to stimulate the economy.
“Nobody likes to be bullied, and Trump is trying to bully Chairman Powell,” said financial advisor Steve Cotton.
The president’s very public campaign to get Powell to cut rates has raised worries among some observers that Trump is undermining the Fed’s traditional position as an impartial referee to fight off inflation, and that such anxiety could end up prompting higher rates in the bond markets, creating higher rates for other forms of credit.
“There is an argument to be made that the investors in bonds want an independent Fed,” Cotton explained. “There would be Fed watchers who would be concerned about the Fed’s independence and would worry that Powell has allowed himself to be bullied.”
Powell has repeatedly expressed his questions about potential inflation implications of the Trump Administration’s still-developing regimen of tariffs and new agreements on foreign trade. “Chairman Powell is saying we don’t know what the full impact will be of Trump tariff policies because they haven’t completed all the negotiations,” said Cotton, “and Powell is correct on that.”
Still, Cotton adds, inflation remains calm, and the economy could use the boost. He suspects rate reductions would be news good enough to overshadow fear and skepticism.
“The people that worry about the independence of the Fed would take a back seat to the people that would cheer lower interest rates,” he said.
“We can fret about the theories about whether the Fed should be independent or not. What really impacts people is where the Federal Funds Rate is right now, where are car loan rates are, where mortgage interest rates are. If there is downward pressure on that, it would be warmly greeted by the stock and bond markets.”