US President Donald Trump and his administration have recently renewed political pressure on the US Federal Reserve (Fed) to cut interest rates.
Trump has once again threatened to fire Fed Chairman Jerome Powell, although the legality of doing so remains a key question. He has also seized allegations that Powell mismanaged the Fed’s multi-billion-dollar building renovation project as a possible avenue for ousting Powell.
Even if Trump fails to remove Powell, he may still try to undermine the Fed chairman by announcing his potential replacement soon — way before Powell’s term expires in May 2026.
Interestingly, the highly respected US Treasury Secretary Scott Bessent, who had been quiet so far on the Fed, has recently joined in the criticism to pressure the Fed as well.
He said in a recent interview with CNBC on July 21 that the government needs to examine the “entire” Fed to assess if it has been “successful”.
He also questioned the Fed’s decision not to lower interest rates so far this year, given that the US has “seen very little, if any, inflation”. “All these Ph.Ds. over there, I don’t know what they do,” Bessent said.
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Why does Trump want the Fed to cut rates?
Trump wants lower rates because net interest payments on US government debt are currently consuming a significant and growing portion of the total government spending. Interest payments this fiscal year are nearing US$1 trillion for the first time in US history.
In fact, the US government has seen its interest payments on the national debt surpass its spending on national defence. This is largely due to a combination of rising interest rates and increased government debt.
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There are concerns that this trend could continue and impact the ability of the US to fund other essential programmes and maintain its military supremacy. This is the key reason why Trump is pushing for lower rates. He is also hoping that lower rates will help to offset the negative effects of higher tariffs on the US economy.
Powell, on the other hand, prefers a wait-and-see approach. He isn’t against rate cuts altogether, but he wants greater clarity on how Trump’s tariffs will impact the US economy and inflation before deciding what the Fed should do.
The US economy has also proven to be stronger than expected so far, and Powell is concerned that premature rate cuts could fuel not just inflation, but also inflation expectations, at a time when the economy is showing resilience and the impact of tariffs on US inflation is still uncertain.
Even if Trump succeeds in pressuring the Fed to reduce rates, it may not significantly reduce the interest payment burden of the US. This is because the federal funds rate is only one factor influencing the yield on US Treasuries.
What are the implications?
Trump’s criticism of Powell and the Fed has raised concerns in global markets that the US president is trying to tinker with the Fed’s independence.
The Fed is independent in its decision-making — meaning its decisions do not require approval from the US president or any other government official. However, this independence is still subject to oversight from Congress, but not the president or his administration.
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It will not be easy for Trump to have full control of the Fed even if he replaces Powell with his appointee. If Trump tries to fire Powell, the Fed chairman could take his case to the US judiciary and the case could drag out on the back of appeals. This could hurt business and investment sentiment, which would not be the best outcome for Trump, with mid-term elections due next year.
Even if Trump does not fire Powell and instead replaces him with his nominee, such a person will still have to be approved by Congress, which is aware of the dangers of tinkering with Fed independence. In fact, Bessent had warned in April that the Fed’s independence in setting monetary policy was a “jewel box that has got to be preserved”.
Even if Trump’s nominee for Fed chair is appointed by Congress, he does not decide monetary policy on his own. US monetary policy decisions are made by a committee in the Fed, comprising twelve members.
The Fed is the custodian of US monetary policy, which is a key pillar of the US economy. Fed independence is seen as benefitting the US economy in the long run if investors, consumers and businesses believe that the US central bank will do whatever is needed without fear of political consequences.
This independence and the belief that the Fed will do the right thing, and not be influenced by political pressure from the president, helps to inspire global investment confidence in the greenback, Treasuries and other US assets like equities and corporate bonds.
If Fed independence is compromised, it could hurt confidence towards the US economy and US assets, which can have significant repercussions not just for the US investment market, but also international markets.
For example, if markets feel that the Fed will cut interest rates because of political pressure from Trump and his team, irrespective of the potential outlook for inflation, investors could demand higher yields from US government bonds to compensate for the risk or even shun such bonds. This could hurt the ability of the US government to raise funds by issuing Treasuries.
Higher Treasury yields because of the higher risk premium could also hurt US government spending and the US budget deficit. Additionally, higher US Treasury yields could also cause government bond yields elsewhere to rise and dent the outlook for global equities and bonds, given the negative correlation between government bond yields and these asset classes.
All eyes on the end-July Fed meeting
Given Trump’s aggressive pressure on the Fed to cut interest rates, investors will keep a close watch on the Fed’s next policy meeting at the end of this month (July 29-30) to see what the US central bank will do and what it will say in its statement after the meeting.
Powell’s press conference will also be closely scrutinised for clues as to what the US central bank might do in the coming months, and to see if the Fed is showing signs of yielding to political pressure to cut rates.
We are already seeing some division in the Fed, with some members of its policy making committee — the Federal Open Market Committee (FOMC) — calling for rate cuts at the end of this month.
At this juncture, the futures market is not expecting the Fed to cut rates at the end of the month, but it sees one to two rate cuts before the end of this year and more cuts in 2026. All in, the futures market is looking at close to four rate cuts in the next 12 months.
A great deal will depend on how US inflation and the economy pans out in coming months.
The Fed has the dual mandate of keeping inflation in check and protecting the labour market.
If the economy and labour market slow down meaningfully, the Fed will have a case to cut rates.
As for inflation data, we have not seen any significant pass-through from Trump’s tariffs so far, but it may be too soon to tell. The impact of tariffs may not show up for months, especially if businesses and consumers are stockpiling ahead of time and exporters are cutting their prices or importers are absorbing the higher tariffs for now.
Also, we might not know the full effect of the tariffs until after Aug 1, when Trump’s updated tariffs kick in — provided he keeps to the deadline. Even if Trump imposes new tariffs on Aug 1, the effects might be muted at first as inventories clear.
Bear in mind as well that tariffs affect a broad range of goods and not all of them are directly sold to consumers, so the effect may not fully show up in consumer prices.
Lower energy prices have also helped to cushion some of the impact from higher tariffs on consumer prices, while political pressure may also have dissuaded some retailers/producers from raising prices.
Bottomline
All in, we remain sanguine on the medium-term investment outlook. We do not anticipate a US recession, but stagflation is a possibility.
The risk that tariffs could cause supply disruptions and inflation to rise significantly will remain a key concern for investors in the coming months.
Nevertheless, this concern has been well telegraphed and if US core inflation only increases modestly to the Fed’s current projection of 3.1% for 2025, or thereabouts, and peaks there, markets should not suffer a big dislocation.
We will get a better idea about how US inflation is impacted by tariffs later this year. Until then, inflation-related data and inflation expectations can cause periods of market volatility and even sharp pullbacks.
What’s going for markets now is a lot of idle liquidity on the sidelines that could provide support, should there be sharp pullbacks. This means that such pullbacks can offer an opportunity to buy/accumulate rather than a reason to run for cover.
Historical data also shows that if there is no US recession, and if the Fed cuts rates, this should augur well for investment markets.
So, it still makes sense to stay invested but it is important to invest carefully and manage risk through portfolio and time diversification.
