Trump ups pressure on Fed, seeking rates of zero ‘or less’

The president's tweets suggest lower rates would allow the U.S. to refinance its outstanding debt.

President Donald J. Trump urged the Federal Reserve to lower interest rates to a level typically reserved for recessions or periods of persistently weak growth, suggesting that such a setting could allow the government to refinance Treasury debt at a lower cost.

The Fed should “get our interest rates down to ZERO, or less,” Mr. Trump said in an early Wednesday tweet that went beyond his previous attacks and demand for a cut of one percentage point. “We should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.”

The idea is flawed. While it’s true that the government could sell Treasury bonds at lower interest rates than those on much of its outstanding debt, it would have to pay a big premium to buy back and retire some old bonds, effectively negating the financial benefits. Certain Treasuries, for instance, fetch prices of as high as $1.40 for every $1 of face value.

Monetary authorities such as the European Central Bank, the Swiss National Bank and the Bank of Japan have had policies on interest rates that are effectively below zero, as a way to boost demand for loans and stimulate sluggish economies. The Fed’s benchmark rate is currently 2%-2.25% following a quarter-point reduction on July 31 — the first cut since the Fed lowered rates effectively to zero in 2008, during the worst financial crisis and economic downturn since the Great Depression.

With Mr. Trump polling behind several Democratic candidates in his 2020 reelection campaign and Americans fearing a recession within the next year, the president is seeking to deflect blame for any economic ills.

He has repeatedly blamed the Fed and Chairman Jerome Powell, who goes by Jay, for raising interest rates too steeply in 2018 and constraining the economy as the president pursues a trade war with China.

“No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing,” Mr. Trump continued in the post. “A once in a lifetime opportunity that we are missing because of ‘Boneheads.’”

Mr. Trump’s reference to refinancing debt followed an online commentary last week by Stephen Moore, who withdrew his candidacy for the Fed board earlier this year.

“The Trump administration should take advantage of today’s bargain-basement borrowing costs by immediately refinancing the national debt,” Mr. Moore wrote on the Heritage Foundation’s website.

Policymakers are widely expected to make another quarter-point cut when they meet next week, though hardly anyone sees interest rates headed to zero in the next two years, according to a Bloomberg survey earlier this month. Meanwhile, economists in a separate poll predict the ECB will cut its deposit rate to minus 0.5% from minus 0.4% on Thursday.

Fed officials balked at cutting rates below zero during the last downturn in part because of fears doing so would hamper money-market functioning and hurt rather than help banks. There are also questions over whether the Federal Reserve Act even allows it to deploy negative rates.

A recent study published by the University of Bath found negative rates decreased lending. Fed Bank of San Francisco research also concluded the introduction of the policy in Japan actually lowered inflation expectations.

“I just don’t see the cost/benefit there being very attractive” Fed Governor Lael Brainard said in an Aug. 5 interview with Yahoo Finance.

[More: The upside of betting on inflation]