Shopee app Trump pressures Fed to cut rates

The Trump administration has recently pressured the Federal Reserve (Fed) to cut interest rates to address the risk of economic recession caused by tariff policies and ease government debt pressure. However, this political intervention may force the Fed into a dilemma between curbing inflation and supporting growth, and even threaten its independence. The following is an analysis of key points:


1. Trump's motivation for pressuring interest rate cuts


(1) Offsetting the economic impact of tariff policies


The Trump administration plans to impose a 35% tariff on goods not included in the United States-Mexico-Canada Agreement (USMCA), which may push up import costs, increase corporate burdens, and even trigger recession risks.


Cutting interest rates can reduce borrowing costs, stimulate corporate investment and consumption, and partially offset the negative impact of tariffs.


(2) Easing government debt pressure


The U.S. federal debt has exceeded $35 trillion, and high interest rates (the current federal funds rate is 5.25%-5.50%) have caused the Treasury's interest expenses to surge (expected to exceed $1.1 trillion in fiscal year 2024).


Lowering interest rates will reduce the cost of issuing new debt and ease the pressure on the fiscal deficit, which is in line with Trump's tendency to "monetize debt" (similar to pressuring the Fed to buy bonds during the 2020 epidemic).


(3) Stimulating the economy before the election


With the 2024 election approaching, Trump hopes to use low interest rates to push up the stock market and employment data to consolidate voter support. Historical experience shows that the Fed's policies in election years are often influenced by politics (such as 2012 and 2020).


2. The Fed's dilemma


(1) Inflation risk has not been eliminated


Although the CPI has fallen from its 2022 peak (9.1%), core inflation is still above 3% (the Fed's target of 2%), and interest rate cuts may push up prices again.


The imposition of tariffs will directly increase the prices of imported goods, forming "cost-push inflation", which, combined with the "demand stimulation" effect of interest rate cuts, will exacerbate price pressures.


(2) Challenges to Independence

The Fed has long been known for its policy independence, but Trump publicly criticized Powell several times during his first term (for example, he said "the Fed is crazy" after the 2018 rate hike).

If it succumbs to political pressure this time, it may damage the market's trust in the Fed and weaken its anti-inflation credibility (similar to the policy mistakes during the "Great Inflation" in the 1970s).

(3) Fluctuations in global financial markets

If the Fed cuts interest rates prematurely due to political factors, it may cause the US dollar to depreciate, push up commodity prices, and lead to capital outflows from emerging markets (such as the "taper tantrum" in 2013).

3. Possible policy directions

(1) A "symbolic compromise" by the Fed

The Fed may cut interest rates slightly (25-50 basis points) in Q4 2024 (before the election), but emphasize data dependence to avoid being seen as politicized.

(2) Maintain an anti-inflation stance

If core inflation remains stubborn, the Fed may postpone cutting interest rates until 2025, even in the face of government pressure, to maintain its long-term credibility. (3) Congressional and market reactions

The Democrats may criticize Trump for "interfering in the central bank" and even promote legislation to protect the independence of the Fed (such as the revision of the Federal Reserve Transparency Act).

If Wall Street believes that the policy is driven by politics, it may exacerbate market volatility (double kill of stocks and bonds).

4. Historical lessons and long-term impact

The lesson of the Nixon-Burns period in the 1970s: Nixon pressured Federal Reserve Chairman Burns to maintain low interest rates, which led to runaway inflation and ultimately the "stagflation crisis".

Risks of the emerging market model: If the independence of the US central bank is damaged, it may slide towards "Turkish/Argentinian-style politicized monetary policy", which will undermine economic stability in the long term.

Conclusion: A severe test of economic governance

Trump's pressure to cut interest rates is not only a short-term policy game, but also a challenge to the independence of the US central bank and the economic governance system. If the Fed succumbs to political pressure, it may repeat the mistakes of the 1970s; if it insists on fighting inflation, it may exacerbate the economic slowdown and affect the election results. The market needs to be wary of fluctuations caused by policy uncertainty, and long-term institutional damage may far exceed short-term economic fluctuations.




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