President Trump may be able to appoint a loyalist to chair the Federal Reserve Board, but that doesn’t guarantee he’ll get meaningfully lower interest rates.
The Fed can only control short-term interest rates, most notably the federal funds rate—the rate banks charge each other to borrow reserves.
Mortgage, other consumer and business borrowing rates are more influenced by the 10-year Treasury rate, which doesn’t always move with the federal funds rate.
The market for U.S. securities is global. Foreign central banks hold treasuries to back their currencies, and the dollar is the vehicle currency in almost 90% of all cross-border trade and investment transactions.
Similarly, with annual deficits in the range of $1.7 to $1.8 trillion, the federal government depends on foreign investors to help finance new outstanding debt.
At 1.4% of global GDP, annual additions to the U.S. national debt are a lot for markets to absorb.
This new debt must compete with additions to foreign government debt. Deficits will grow in China to combat weak domestic demand precipitated by a property crisis, Japan to stimulate growth and Europe to rearm to deter Russian aggression.
The private sector’s appetite for capital, in particular borrowing to build out artificial intelligence, will make financing the federal deficit even more challenging.
Bond investors generally seek a premium over inflation.
Likely, we are returning to conditions in capital markets that more closely resemble the decades prior to the 2008 Global Financial Crisis than the period between the GFC and COVID.
Over the prior four decades, inflation averaged 4.0% and the 10-year treasury yield averaged 7.4%.
Since September 2024, the Fed has cut the federal funds rate 1.75%. Meanwhile, the 10-year Treasury rate has risen from about 3.7% to more than 4%, reflecting more intense competition for funds and elevated inflation expectations.
The federal funds rate is set by the voting members of the Federal Reserve Open Market Committee, and many members have expressed ambivalence about lowering rates further.
At the December meeting, Chairman Powell faced a challenge in forging a consensus for a 0.25% rate reduction.
The policy statement that followed the meeting and Mr. Powell’s comments at the press conference indicate that FMOC may pause to evaluate the extent and timing of future reductions.
Mr. Powell’s term as Chairman ends in May, and President Trump wants to appoint someone who shares his appetite for lower interest rates.
After the December meeting, Kevin Hassett, Chairman of the White House National Economic Council and a leading candidate for the position criticized Mr. Powell for not offering the committee a stronger set of data to support a larger rate cut.
However, if the Fed Chairman isn’t viewed as guarding the central bank’s independence and making recommendations based on a dispassionate assessment of the risks to lowering inflation to 2% and accomplishing full employment, he could easily have a revolt on his hands.
Sustaining stability in financial markets and international confidence in the dollar and U.S. debt requires that the Fed doesn’t become subordinated to the White House, as presidents from both parties naturally prefer lower interest rates.
Lower rates make buying homes and cars easier for voters and reduce the share of federal outlays consumed by interest payments on the national debt.
As Kevin Hasset emerged as a frontrunner for the president’s nomination for Chairman, colleagues who had supported his nomination to chair the NEC expressed misgivings and doubts about whether he has the temperament and fortitude to resist Mr. Trump’s pressure. Members of the Treasury Borrowing Advisory Committee reportedly voiced concerns about his potential appointment.
The dollar has played a central role in global commerce owing to the sheer size of the U.S. economy and investor confidence that the currency will be well managed and the Fed won’t become captive to the federal government’s borrowing needs.
At the December meeting, the Fed announced it will purchase $40 billion a month in short-term Treasury notes to maintain adequate liquidity in financial markets.
The Fed is effectively printing money and by monetizing the national debt, it relieves pressure on the Treasury to sell new debt.
Those purchases are expected to moderate, but market confidence, domestically and internationally, depends on the Federal Reserve being above politics and immune from White House pressure.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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