President Donald Trump is harass the federal reserve To reduce interest rates, but even if the Fed yielded to pressure, this would not necessarily lead to a drop in loan costs for consumers.
In fact, say economists, Current attacks on the Fed Jerome Powell chair and its pricing policies Could keep the longer -term interest rates that matter to consumers and companies higher than they would be otherwise. A less independent Fed can lead, over time, to higher borrowing costs, because investors fear that inflation can increase in the future. Consequently, they require higher yields to have treasury titles.
Trump has Powell has exhorted several times To reduce the short -term interest rate that the central bank controls. The Fed generally reduces its rate during an economic slowdown to encourage more loans and expenses, and the student to cool the economy and fight against inflation when prices increase.
But long -term rates on things like mortgageAuto loans and credit cards are largely set by market forces. And in recent weeks, fears that Trump’s radical rates could increase inflation, as well as administration FED independence threatshave led the markets to push these rates in the longer term. It is not clear that the Fed can completely reverse these trends.
“It is not automatically true that even if the Fed had to reduce rates, you would see a measured drop in long -term interest rates,” said Francesco Bianchi, an economist at Johns Hopkins University. “This type of pressure on the Fed could turn against you … if the markets do not believe that the Fed has inflation under control.”
Trump renewed calls on Wednesday and Thursday in Powell to reduce the short -term rate of the Fed, telling journalists that the chair “makes a mistake” by not doing so.
And last week, Trump suggested that he could dismiss PowellWhile an higher assistant said that the White House “studied” if she could do.
The stock markets have plunged in response, the return on the bond of the treasury to 10 years has increased and the dollar has dropped, An unusual combination This suggested that investors sold most of the American assets. The markets recovered these losses after Trump said Tuesday that he had “no intention” to dismiss the chair of the Fed.
However, the threats to the independence of the Fed have upset Wall Street investors, as they see a Fed free from political pressure as essential to keep inflation under control. Independent Fed can take unpopular measures, such as increased rates, to combat inflation.
“The FED threat does not provide markets – that scares them,” said Lauren Goodwin, market chief strategist at New York Life Investments. “And the result is often the opposite of what any administration wants to see: higher rates, lower confidence and more market problems.”
Since Trump began to impose prices in early March, when he slapped the rights in Canada and Mexico, the 10 -year -old treasure yield rose from 4.15% to around 4.3%. Yield is a reference for mortgage rates and other loans. Mortgage rates, in turn, increased during this period, from 6.6% to 6.8%.
While Trump says that he is negotiating on prices with many countries, most economists expect a level of functions to remain in place for at least this year, including his 10% of rights on almost all imports.
The yield in 10 years fell Thursday when two federal reserve officials said that rate reductions were possible this summer, if the economy vacillates and unemployment increased.
However, last fall, the longer -term interest rates also dropped in anticipation of the rate decreases, but then increased once Fed Cut in September Then continued to increase while the central bank again reduced its rate in November – two days after the elections – and in December. Mortgage rates are now higher than when the Fed has dropped.
A series of factors can affect the long -term cash rates, including future growth and inflation expectations, as well as the supply and demand for state bonds. Bianchi is concerned that the budgetary deficits of the obstinately high government – which are funded by billions of dollars of treasury – could also increase long -term rates.
If the Fed has reduced rates now, elementary borrowing costs “would move in the opposite direction, absolutely,” said Goodwin, “because the threat of inflation is so palpable – this decision would question their credibility.”
Trump said in an article on social networks this week that there was “practically no inflation” and, therefore, the Fed should reduce its key rate, from its current level by around 4.3%. Many economists expect the central bank to do it this year. But Powell stressed that the central bank wants to assess the impact Trump policies before making movements.
Inflation has dropped in recent months, falling to 2.4% in March, the lowest level since last September. However, to the exclusion of volatile food and energy categories, central inflation was 2.8%. Basic prices often provide a better signal from inflation management.
A key problem for the Fed is that the economy is very different now from that of Trump’s first mandate. At the time, inflation was in fact lower than the target of the Fed. At that time, it was “evidence” to reduce rates, said Bianchi, if there was a threat of recession, because inflation was not a problem.
But now, prices will almost certainly increase prices in the coming months, at least temporarily. This increases the much higher bar for a drop in the Fed rate, said Bianchi.
However, once there are clear signs that the economy deteriorates, such as an increase in the unemployment rate, the Fed will reduce rates, no matter what Trump does, economists said.
Trump accused Powell of being often “too late” with his pricing decisions, but ironically, the Fed can move more slowly this time due to the higher price threat of prices. Without clear evidence of a slowdown, Fed officials would be concerned with being considered as yielding to Trump’s political pressure if they cut.
“Powell knows the irreparable damage that would occur if he was perceived that he had cut because he was forced by Trump,” said Tom Porcelli, chief economist in the United States at Pgim Fixed Revenue.
The Fed now “will be even more delayed because I think you are going to initially an inflation lift, before obtaining the slowdown in more pronounced growth,” said Porcelli.
Be that as it may, it can take more than one or two Fed cuts to reduce the longer term borrowing costs, said Bianchi.
“To really reduce long-term rates, you need to provide a stable macroeconomic environment, and for the moment, we are not there yet,” he added.
