Enda Curran
4 min read
In This Article:
(Bloomberg) -- Donald Trump is putting new spin on his months-long call for the Federal Reserve to lower interest rates: It’s important for bringing down the cost of government debt.
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Soon after returning to the White House for his second term, the president began pressuring Chair Jerome Powell to aid the economy as it transitioned to higher tariff levels. Now, Trump says that rate cuts are needed to address what’s become one of the biggest causes of a supersized federal budget deficit.
Treasury figures last week showed the government shelled out some $776 billion in interest costs on the federal debt over the past eight months. That’s up 7% on the same period of the previous fiscal year, when the interest burden already climbed to the highest since the 1990s.
The tally, which now well outstrips the amount spent on defense, reflects both the much higher size of outstanding debt — following Covid spending and multiple rounds of tax cuts this century — as well as the legacy of higher interest rates from the Fed’s battle with inflation. Moody’s Ratings flagged rising debt costs as a key reason for downgrading the US sovereign rating last month.
“I would like to get this guy to lower interest rates, because if he doesn’t, we have to pay,” Trump said during a June 12 White House event, referring to Powell. The president argued that 2 percentage points of Fed rate cuts could save $600 billion a year in interest costs.
Inflation Risk
Economists warn that such a move would likely backfire. Lowering rates even if the underlying economy didn’t need it would risk stoking fears of higher inflation. Reduced demand for Treasuries would then send bond yields even higher — worsening the government’s interest bill.
“Unless warranted by macroeconomic conditions, lowering interest rates would spark higher inflation, and ultimately higher nominal interest rates,” said Michael Feroli, chief US economist at JPMorgan Chase & Co.
Treasury Secretary Scott Bessent early on in the administration said that he and Trump were zeroing in on 10-year Treasury yields, not the Fed’s overnight rate. But Trump has returned to the same line of argument as during his first term: that Powell and his colleagues should bring down their policy rate.
