"I think we should be paying 1% interest, but we're paying much more because of somebody that probably has a Trump fixation," US President Donald Trump said on 27/6, alluding to Federal Reserve (Fed) Chairman Jerome Powell.

This isn't the first time Trump has criticized Powell. For months, the US president has repeatedly urged the Fed to cut interest rates, but to no avail.

Analysts suggest Trump wants to reduce the government's borrowing costs, giving the budget more room to offset the deficit from the tax cuts and spending increases. However, an interest rate as low as 1% doesn't reflect the US as the "most attractive economy in the world" for investment, as Trump claims. This is usually an emergency response when the economy faces serious trouble.

Meanwhile, the US economy isn't currently facing such challenges. With full employment, a growing economy, and inflation still above the Fed's 2% target, the ultra-low interest rate Trump desires could backfire. Investors in the $36,000 billion US government bond market might think such a move means the Fed has succumbed to political pressure and cut rates for the wrong reasons.

Donald Trump (left) and Jerome Powell at the White House in 2017. Photo: AFP

Donald Trump (left) and Jerome Powell at the White House in 2017. Photo: AFP

The US Congress has tasked the Fed with maintaining price stability and full employment, not helping the government borrow cheaply. Furthermore, cutting interest rates in the current environment could cause inflation to accelerate again.

"I don't believe that if tomorrow the Fed decided to cut rates to 1%, it would have the impact on long-term rates that it normally would. Instead, the bond market would worry about inflation flaring up and the Fed losing its independence," said Gregory Daco, chief economist at EY-Parthenon. He believes the current interest rate (4.25-4.5%) "still has room to decrease," but not as drastically as Trump wants.

Daco noted that the US unemployment rate is currently at 4.1%, economic growth is around 2%, and inflation is 2.5%. "The data suggest there is no need for a sharp and immediate rate cut," he said.

In fact, the Fed has applied a 1% interest rate over the past 20 years. However, none of these periods coincided with strong economic growth. Unemployment rates were all 6% or higher.

Former President George W. Bush ran the country during a period when the Fed applied a 1% interest rate. This was after the 9/11 terrorist attacks and the US-led military intervention in Iraq in 2003.

In 1/2009, former President Barack Obama took office when interest rates were near zero. At that time, Washington was still reeling from the global financial crisis. At the end of President Trump's first term, the Fed also lowered rates to near zero as Covid-19 crippled the economy.

While the Fed is highly influential, it doesn't have many tools to affect the economy during normal times. Each year, Fed officials typically meet eight times to decide the federal funds rate.

This isn't the rate that consumers and businesses pay, but it affects many other interest rates, from mortgages and credit cards to US government bond yields. Among these, Trump is most concerned with government bond yields.

In April, fluctuations in this market led the US president to postpone retaliatory tariffs for 90 days. That same month, when Trump threatened to fire Powell, treasury bond yields also soared, forcing him to back down.

Last month, the US president sent Powell a handwritten letter listing the interest rates of several central banks. He also circled the very low rate he considered appropriate for the US at the time. Later that month, the US president announced he would only nominate a supporter of lower interest rates as the next Fed chair.

Meanwhile, Fed officials have repeatedly asserted that cutting rates now would be very risky. They have yet to determine whether Trump's new import tax policy will accelerate inflation.

The Fed has many formulas for calculating appropriate interest rates based on economic data. But none of them produce a rate as low as the president expects.

Ha Thu (via Reuters)