With the upcoming FOMC decision next Wednesday, the thought of a further Trump tirade towards Powell dawned upon me. Ever since Trump’s inauguration in January, he’s pleaded with the Fed Chair to cut interest rates from its current levels of 4.25-4.5%, but the latter has refused to budge, citing ‘high inflation’ and ‘economic uncertainty’ as a reason to keep them where they are. Hence, this has sparked public tension between the two, with Trump even threatening to fire Powell which has cast doubts over the US Federal Reserve as its own standalone entity. However, amongst the chaos of these two public figures, the question very few people are asking is why Trump desperately needs the rates lower.
Debt Refinancing
Trump has repeatedly spoken about the importance of a growing American economy, often citing the stock market as an indicator of his success as president. Hence, the call for lower rates is an attempt to increase liquidity flows within the US economy, so businesses and hedge funds increase their risk appetite towards the stock market; in a nutshell, a win for Trump. More importantly, Trump and Scott Bessent (US Treasury Secretary) need lower rates because the Treasury Department need to refinance $9.2 trillion worth of debt out of the $36 trillion which has matured this year. This debt will not be ‘paid off’ per se; it will just be refinanced with another more favourable loan. However, Trump wants this to take place at a ‘much’ lower rate to save America billions in interest rate costs and potentially be used to stimulate growth elsewhere in the economy. Ever since 2009, the Federal Government has been stuck within this cycle of borrowing as it has ran a Federal Deficit for every year since and this has meant that there is a constant need for new capital as there’s maturing debt which needs financing. Although the Treasury could continue to refinance the debt at the current rate, which could in turn be bullish for retail and instutitional investors as more liquidity flows into the economy from the government than at a lower rate, Bessent is aware that when there is a lack of liquidity during these refinancing junctures there will be credit market stress, increasing bond yields on the long end causing market wide panic. Michael Howell of CrossBorder Capital stated “every financial crisis you can think of over the last few decades has been a debt refinancing problem”. From the 2008 subprime crisis to the 2019 repo market turmoil, each canon event was fundamentally driven by institutions grappling with short-term debt rollovers amid sudden liquidity shortages.
Inflation or no inflation
Jerome Powell’s reasons for not lowering rates have been the tariff uncertainty caused by Trump, which he believes adds inflationary pressures on the economy. Powell’s legacy has been to keep inflation steady, often reminding the public of his ‘2% target’ and be a custodian of a ‘strong labour market’. It’s been 5 months since Liberation Day which in itself marked a pivotal point in the economic history of America as Trump imposed blanket draconian tariffs on several countries. Many thought those tariffs would increase inflation to a point where the Federal Reserve would need to hike interest rates in the coming months; however, both CPI and PPI have been well within range of 2.4-2.6% which has added to Trump’s confusion as to why rates have not been lowered. This confusion was further fuelled when data was released this week that 911,000 fewer jobs have been added to the economy than had been previously reported, signalling economic weakness and a desperate need for a rate cut. Those false labour market revisions in the last year, has sparked debate with many calling it a tactic to protect Powell and the Federal Reserve’s decision to stick with a rate pause for the entirety of this year.
A winner?
With the market pricing in a 25 bps cut (0.25%) it looks like Trump will have his way over the Federal Reserve as Powell seems to be softening his hawkish stance, especially after back-to-back months of the labour market showing weakness. But that won’t appease Trump who is calling for a full 100 bps cut in this September FOMC meeting with the desire for further cuts by year end. Bessent and Trump want to save trillions in interest rate costs but Powell wants his legacy to be one where inflation was under control. It won’t be long before we realise whether it was ‘Too Late Powell’ or ‘Trumpism: Where tariffs trump logic and tweets dictate policy!’