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President Donald Trump is pushing the Federal Reserve to lower interest rates as he seeks to put the U.S. economy into overdrive with sprawling ambitions that are running into resistance from markets over concerns about ramping up inflation through tax cuts and tariffs.
Trump said he expects energy prices will fall enough under his administration will bring inflation back down and allow the Fed to cut its benchmark interest rate. Speaking to the World Economic Forum in Switzerland last week, he said that he will demand rates come down once oil prices decline.
“With oil prices going down, I’ll demand that interest rates drop immediately,” Trump said.
The Fed has cut its benchmark rate three times, totaling a reduction of 1% over the last quarter of 2024, but has also tempered expectations about further reductions as it braced for the impacts of a new administration and sticky inflation.
Trump has a history of disagreeing with the Fed’s rate decisions and pushing the central bank to cut them. He told reporters in the Oval Office last week he wants to see rates “come down a lot” and said he understands them better than Federal Reserve Chairman Jerome Powell and the Federal Open Markets Committee that votes on the decisions.
“I know interest rates much better than they do,” he said. “If I disagree, I will let it be known.”
But Trump’s demands are running into a central bank that has already dialed back its expectations about cutting rates and an economy that has continued to grow at a strong pace with low unemployment levels, further limiting the reasons the Fed would want to cut rates while inflation is still above its 2% target.
Longer-term interest rates, which are influenced by investor expectations about what’s to come, have also increased.
The bump in long-term rates is a reflection in expectations of stronger economic growth and fewer cuts from the Fed.
Energy costs have also fallen dramatically after going through a painful increase during the early days of Russia’s invasion of Ukraine. U.S. production of gas and oil has soared to the highest levels on record, natural gas prices have stayed low and the cost of a barrel of oil is around $76, roughly in line with the average cost over the last 20 years.
Trump has vowed to unleash American energy production to finish off inflation and declared a state of emergency to do so but there are questions on whether U.S. companies will actually be incentivized to drill more with the cost of oil being low.
The economy has grown by at least 3% on an annual basis for four out the last five quarters, unemployment sits at 4.1% and job openings remain strong by historical standards. Inflation has also fallen significantly from the highs of over 9% of two years ago but remains stubbornly above the Fed’s 2% target, coming in at 2.9% in December.
Wages have also increased faster than the pace of inflation, which gives consumers the ability to maintain their spending levels despite higher prices. Robust consumer spending accounts for a majority of U.S. economic activity and is important to continued growth but also poses risks to inflation if supply and demand do not stay balanced.
“The reality is the Fed is very data dependent, and that’s what we’re seeing — that the new data coming in really speaks to the Fed needing to be cautious of any rate decreases,” said Mark Williams, a finance lecturer at Boston University’s Questrom School of Business and former bank examiner at the Federal Reserve. “I wouldn’t be surprised if the Fed is handcuffed and actually does zero rate cuts for 2025. In the new environment, they need to be cautious. I would be very surprised if the Fed cut rates, and if they did, then they would be perceived as being very political.”
Maintaining its credibility with investors throughout the inflation crisis has been a priority from the Fed. Powell has repeatedly said the central bank is making its decisions based on economic data rather than political pressures, with rate decisions being delivered amid a bitter presidential election and in the aftermath of the coronavirus pandemic that turned the world’s economy on its head.
Trump’s own economic policies have also prompted more caution from the Fed. Economists are concerned the combination of massive tax cuts, high tariffs on the U.S.’ main trading partners and mass deportations hurting the labor supply that were proposed on the campaign trail could put upward pressure on prices.
The White House has scaled back some of the loftier promises on tariffs from the campaign, but Trump has also made threats to implement 25% tariffs on all goods from Canada and Mexico, which would impact all kinds of products throughout the economy.
Trump has also said he would enact a 10% tariff on Chinese goods starting next month in another move that could provoke retaliatory levies against American products.
“When we think about Trump pressure basically, he’s putting upward pressure. He’s fueling inflation through the tariff increases, the immigration crackdown and then also tax cuts, which will ultimately increase deficit spending, which will then put upper pressure on interest rates,” Williams said.
Have a news tip? Contact Austin Denean at atdenean@sbgtv.com or at x.com/austindenean.