Updated 6 min read
President Trump wants the Federal Reserve to cut short-term interest rates all the way to 1%. That’s something the Fed would typically do only in an emergency situation, such as a sudden recession or financial panic. What is Trump so worried about?
Short-term rates are currently at about 4.25%. The historical average is 4.6%. The Fed moves rates up or down to manage inflation and keep the economy healthy. It has signaled that it may lower rates to around 3.5% during the next year or so if inflation eases.
But Trump’s own tariffs are standing in the way. By putting new taxes on roughly $3 billion worth of imports, Trump is raising costs on businesses and consumers. Most economists think the tariffs will push inflation up by a percentage point or so, from 2.4% now to 3.5% or a little higher.
Read more: What Trump's tariffs mean for the economy and your wallet
Trump doesn’t seem to care about inflation, even though he ran for president last year promising to “bring prices way down.” He’s been hectoring the Fed and its chair, Jerome Powell, to cut rates for months, first by one point, then by two, and now by more than three. “Right on track to demand negative interest rates somewhere after July 4,” Jim Bianco of Bianco Research quipped recently on social media.
The Fed cuts rates when it feels inflation is under control and the economy might need a little bit of juice. Lower rates make borrowing cheaper, stimulating spending and investment. In normal times, the Fed cuts gradually, by a quarter-point once every couple of months. But it can cut aggressively when needed. During the Great Recession from 2007 to 2009, the Fed cut rates by nearly 5 points in 15 months. After the COVID pandemic erupted in 2020 and there was a sudden recession, the Fed cut by 1.5 points in two months.
Anything more than a quarter-point cut usually signals that something is wrong. Trump wants a rate cut of recessionary proportions. Somebody must be telling him we have a problem, Houston.
Trump’s economic advisers, including Treasury Secretary Scott Bessent and White House economist Kevin Hassett, are publicly bullish on the economy. That’s their job. But they probably have the same concerns many economists and investors have: The economy seems to be slowing, the job market is weakening, the national debt is growing unsustainably large, and, yes, the Trump tariffs will cause more harm than good.
One cause Trump has championed during both presidential terms is lower rates to make federal borrowing cheaper. Trump regularly talks about “refinancing” the government’s debt, something he practiced frequently as a real estate developer operating with borrowed money.
