Should The Fed Cut Rates?

As reported in this CNN article, the Federal Reserve decided yesterday to hold rates between 4.25% and 4.50%. President Trump, who has called for major Federal Reserve rate cuts, was disappointed in the Fed's decision. In a Truth Social, Trump said that rate should be cut by 2.5 percentage points–equivalent to ten standard rate cuts. Trump called Federal Reserve chair Jerome Powell "too late" and said he is "costing the country billions." The president's criticism of Powell is unique, as the Fed is meant to operate independently from the president.

President Trump' calls for rate cuts highlights an interesting, and growing tension between fiscal ambition and monetary caution. Cutting rates by 2.5 percentage points would make government borrowing much cheaper, lower corporate financing costs, and revive interest-sensitive industries like real estate and construction. In the short term, cheaper credit could spur investment and hiring, helping offset the slow growth from tariffs. Furthermore, mortgage rates remain above 6%, slowing down the housing market. This is particularly hurting younger/first time homebuyers. Lower rates could provide life to the housing market, boosting GDP figures. While all of that sounds good, the risk of inflation looms overhead. Economists worry that cutting rates, especially large cuts, could weaken the dollar and further widen the deficit as Treasury yields become more volatile. The Fed's dual mandate–to achieve price stability and maximum employment–requires the Fed to be very cautious of actions that could cause inflation/unemployment. Market reactions to the Fed's announcement show how expectations affect markets: equity indices rose due to hopes of future cuts, while bond spreads narrowed in anticipation of lower yields.