President Donald Trump has been urging the Federal Reserve to cut interest rates, but even if the Fed were to comply, it might not lead to lower borrowing costs for consumers. In fact, economists argue that Trump’s criticism of Fed Chair Jerome Powell and his tariff policies could keep long-term interest rates higher than they otherwise would be. A less-independent Fed could eventually result in higher borrowing costs as investors worry about potential inflation spikes, leading them to demand higher yields on Treasury securities. Trump has repeatedly called for Powell to reduce the short-term interest rate controlled by the central bank. Typically, the Fed lowers rates during economic downturns to encourage borrowing and spending, and raises them to combat inflation. However, long-term rates like those for mortgages, auto loans, and credit cards are largely determined by market forces. Recent fears over Trump’s tariffs and threats to the Fed’s independence have pushed these long-term rates higher, making it unclear if the Fed can reverse these trends alone. Economists warn that pressure on the Fed might backfire if markets doubt its control over inflation. Despite Trump’s renewed calls for rate cuts, threats to the Fed’s independence have unsettled investors, as they value a politically independent Fed for maintaining inflation control. Since Trump began imposing tariffs, the 10-year Treasury yield has risen, affecting mortgage rates. While some economists expect tariffs to remain this year, others believe the Fed will cut rates if the economy weakens. However, cutting rates now could raise longer-term borrowing costs due to inflation concerns. Ultimately, a stable macroeconomic environment is needed to truly lower long-term rates.
— new from ABC News
