Trump takes new debt-focused tack in latest attack on Fed

Donald Trump is putting new spin on his months-long call for the Federal Reserve to lower interest rates: It’s important for bringing down the cost of government debt.

Soon after returning to the White House for his second term, the president began pressuring Chair Jerome Powell to aid the economy as it transitioned to higher tariff levels. Now, Trump says that rate cuts are needed to address what’s become one of the biggest causes of a supersized federal budget deficit.

Treasury figures last week showed the government shelled out some $776 billion in interest costs on the federal debt over the past eight months. That’s up 7% on the same period of the previous fiscal year, when the interest burden already climbed to the highest since the 1990s.

The tally, which now well outstrips the amount spent on defense, reflects both the much higher size of outstanding debt — following Covid spending and multiple rounds of tax cuts this century — as well as the legacy of higher interest rates from the Fed’s battle with inflation. Moody’s Ratings flagged rising debt costs as a key reason for downgrading the US sovereign rating last month.

“I would like to get this guy to lower interest rates, because if he doesn’t, we have to pay,” Trump said during a June 12 White House event, referring to Powell. The president argued that 2 percentage points of Fed rate cuts could save $600 billion a year in interest costs.

Inflation Risk

Economists warn that such a move would likely backfire. Lowering rates even if the underlying economy didn’t need it would risk stoking fears of higher inflation. Reduced demand for Treasuries would then send bond yields even higher — worsening the government’s interest bill.

“Unless warranted by macroeconomic conditions, lowering interest rates would spark higher inflation, and ultimately higher nominal interest rates,” said Michael Feroli, chief US economist at JPMorgan Chase & Co. 

Treasury Secretary Scott Bessent early on in the administration said that he and Trump were zeroing in on 10-year Treasury yields, not the Fed’s overnight rate. But Trump has returned to the same line of argument as during his first term: that Powell and his colleagues should bring down their policy rate.

“Unsustainable” levels of interest payments are a product of Biden administration economic policies, a senior White House official said when asked about Trump’s call for the Fed to cut rates to save on debt-servicing costs. Trump’s platform of tax cuts, deregulation and energy expansion are “already delivering” by normalizing rates and putting the US on a more sustainable fiscal path, the official said.

Trump indicated last week his concern now is about a wave of maturing debt that will need to be refinanced at much higher cost than when it was issued. Back in 2020, US debt sales surged to pay for pandemic rescue packages, and much of that is now coming due. Nomura Holdings analysis shows the US has over $7 trillion of debt set to mature by year-end.

“In the short run, cutting interest rates would almost certainly make a material difference in lowering the US government’s interest burden,” said David Seif, chief economist for developed markets at Nomura. But the benefits “could easily be short-lived” thanks to rising inflation expectations that ultimately boosted interest costs, he said.

The debate over Trump’s arguments comes just as Republicans hash out a new tax-cut package that fiscal watchdogs say will make US borrowing needs even bigger in coming years. The administration has tried to assuage fiscal hawks that tariff revenues and faster economic growth will more than offset the cost of tax reductions. Interest savings may be another element of Trump’s argument.

In its tally of the cost of the House version of the tax bill, the nonpartisan Congressional Budget Office has estimated a debt-service cost of $551 billion over a 10-year period.

But cutting rates to lower government spending isn’t part of the Fed’s statutory job. Congress has charged it with focusing on price stability and maximum employment. Doing otherwise risks undermining the central bank’s credibility and perceptions of independence from the White House.

“The fiscal situation is not the Fed’s mandate,” said Stephanie Roth, chief economist at Wolfe Research. “They should only cut rates if the economy is weakening or they feel rates are high relative to their estimate of neutral — not to bail out the fiscal situation.”

Even worse, said JPMorgan’s Feroli, if inflation were to reignite in the wake of fresh Fed rate cuts, bringing prices back under control again “might require a painful recession — which would lower nominal incomes and tax revenue, further aggravating the fiscal situation.”