Trump's 1% Rate Push Would Backfire, Analysts Warn
Analysts say Trump's demand for 1% rates is impractical and could crash the dollar, while his public criticism has largely spared new Fed chair Kevin Warsh.
President Donald Trump's repeated demand that the Federal Reserve cut its policy rate to 1% is impractical and would likely backfire, analysts say, even as the White House keeps up pressure on the central bank ahead of November's midterm elections.
The Fed's benchmark rate currently sits in a range of 3.75% to 4%. A cut of roughly three percentage points to reach 1% "seems cataclysmic," said J. Benson Durham, founder of the investment research firm DASM.
According to Durham, such a move would trigger major dislocation in global financial markets. Treasury yields would rise as investors priced in higher inflation, countries such as Germany could draw capital away by offering only slightly better returns than the US, and the dollar would "plummet." The net result, he said, is that the US government could end up paying more to borrow than it does now.
Trump has argued that the US deserves ultra-low borrowing costs as the world's largest economy and, in his view, its safest credit. But some figures close to the president say his rate demands should be read less as a policy prescription and more as a way to deflect attention from high consumer prices before the midterms.
Pressure beyond the rate call
The president's push on the Fed extends past the 1% figure. He is seeking to remove 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. Powell remains a Fed governor, which has denied Trump a fresh appointee at the central bank.
Some analysts describe the Fed as a convenient scapegoat for a president heading into the midterms with mortgage rates near 7% and rising prices for staples such as ground beef and gasoline. Inflation has climbed since early in Trump's term, driven by the combined effects of his tariffs and energy costs linked to the US war with Iran. The Fed's preferred inflation gauge stood at 3.7% in July, and the central bank does not expect it to reach its 2% target before 2029.
A softer tone for Warsh
Trump's public remarks have mostly spared Kevin Warsh, his handpicked successor to Powell, and focused instead on other Fed policymakers. After the Fed raised rates last week for the first time in three years, in a unanimous vote, Trump criticized the decision and repeated his 1% demand, but framed Warsh as constrained by a "political" board. He said he had told Warsh in a phone call beforehand to side with the majority if needed. Warsh has said he will not discuss his conversations with the president.
Some administration allies privately praised Warsh after the rate decision, according to one person involved in the exchanges who requested anonymity. A White House ally who liaises with Warsh told Varta Wire that calls for 1% are unrealistic given how global bond markets work. "Can everybody just wake up? If you mess up the bond market, it's good for the bond investor and no one else," the person said. The White House did not respond to requests for comment, and the Fed declined to comment on Trump's remarks.
The contrast with Powell is notable. Trump began criticizing Powell early in his first term over rate increases, and the relationship stayed tense; Powell did not openly push back until early this year, when the administration sent a grand jury subpoena over the construction project. Warsh, long seen as an inflation hawk, has laid out the case for higher rates and appears to maintain a more cordial line with the president.
Warsh "has repeatedly said the Fed will deliver price stability. Wednesday's rate hike shows that he means it," Apollo Global Chief Economist Torsten Slok said after the Sept. 16 decision.
Grover Norquist, head of the conservative group Americans for Tax Reform and an outside Trump economic adviser, said the president is expressing discomfort with the pain of higher rates, but should recognize the Fed is not at fault for having to raise them.
Polls suggest the political stakes are high. A Varta Wire/IPSOS survey published Monday found just 17% of respondents approve of Trump's handling of the cost of living, the top issue Americans say will shape their vote in six weeks.