Trump wants the Fed to control more than it can.
If President Trump gained control of Fed policy, monetary decisions would cater to short-term political goals rather than the long-term stability.
Misguided Play for All the Marbles
The Daily Economy comments on Trump Plays for All the Federal Reserve Marbles
After the dismal July jobs report, President Trump has doubled down on his efforts to pressure the Federal Reserve to lower its target overnight interest rate (FFR).
Two of his proxies on the Federal Open Market Committee (FOMC), Chris Waller and Michelle Bowman, dissented from the FOMC’s decision to leave the Fed’s target FFR unchanged. And his recent appointment of Stephen Miron to replace Adriana Kugler move the Fed more in President Trump’s direction. But even if Trump gets the interest rate target cuts he has been lobbying for, it likely won’t satisfy him.
That’s because he, and many others, are actually concerned about interest rates other than the one that the Federal Reserve sets. Mortgage rates and corporate borrowing rates are tied to the 10-year Treasury bond rate – which also happens to be an important interest rate for the cost of federal government borrowing. While lowering the short-term rate seems like it would put downward pressure on the 10-year rate, this is not necessarily the case. In fact, the FFR is 1 percent lower than a year ago, while the 10-year is .2 percent higher than a year ago.
The 10-year interest rate has not declined because the large increase in government bond supply—driven by high Congressional spending—pushes rates upward. The supply must decrease or the demand must increase for 10-year bonds before the 10-year interest rate will fall. If Congress were to slash the budget deficit, the 10-year rate would fall on the expectation that the future supply of 10-year Treasury bonds will diminish.
But there is another avenue to artificially lower the 10-year rate that Trump has not pushed yet. That avenue entails the Federal Reserve buying longer-term US debt. This has been done before by the Fed under Chairman Bernanke’s Quantitative Easing (QE) programs. It was called Operation Twist. In 2011, the Federal Reserve sold about $400 billion of short-term government debt and replaced it with long-term government debt in order to drive down long-term interest rates.
While this program successfully repressed longer-term interest rates, one can question the merits of such a policy. After all, lowering the cost of federal borrowing made it easier for Congress to run up the debt.
One of the dangers of the FOMC caving to Trump’s pressure to lower the FFR is that he will almost certainly push them to engage in an Operation Twist-style bond-buying program if the 10-year rate fails to fall; and it likely won’t, given that we have trillion-dollar deficits as far as the eye can see.
Playing games with the central bank and creating new currency to finance irresponsible deficit spending is the practice of struggling third-world countries. As the wealthiest nation in the world, we should ask more of our leaders and of our central bank officials.
A Word About Control
I created the lead chart to show what the above article is saying.
The Fed can “control” only one thing at a time. It can lower the Fed Funds rates, but it cannot control how the economy performs at that rate. Artificially stimulating jobs also stimulates inflation.
The same applies to misguided efforts to suppress the long end of the curve by direct QE intervention.
Q: Didn’t we just try that? Did we like the inflation result?
A: Yes and no.
Trump wants to bully the Fed to lower rates. But check out the directional arrows on the lead chart. Yields rose across the board until the Fed paused rate cuts.
Then the 10-year treasury yields paused along with the Fed. But the 30-year long bond yield continued rising.
Spending Is Out of Control
Howling at the Fed will not fix the problem. Spending is out of control, and Trump demanded more spending.
And the Fed cannot control spending, it can only react to what Congress does.
We cannot prove where long-term bond yields would be had the Fed listened to Trump’s carnival barking. But the chart itself suggests the logical answer.
Where to From Here?
The Fed is in a no win position. It’s very possible yields start plummeting. But if so, that will be due to falling demand and a slowing economy.
The next jobs and CPI reports will be telling. If the jobs report is bad, Trump blame Powell no matter what the CPI does.
I remain open to stagflation or a normal recession because none of us know what Trump will do or how the market will react to that.
But long-term, Trump has addressed nothing. So don’t expect to see zero interest rates again.
Risks to the Downside
I side with Powell and his newfound belief regarding downside risks to the labor market.
In fact, I have been harping about jobs for quite some time, expecting the negative revisions that happened.
Payroll Disaster
On August 1, I discussed the Payroll Disaster, Jobs Rise 73,000 but Massive Negative Revisions
There were 258,000 negative revisions in May and June.
The labor market is much weaker than most economists realize.
For specific details discussion of why we know this. please see QCEW Report Shows Overstatement of Jobs by the BLS is Increasing
So, will rate cuts fix a weak labor market? We are about to find out, but my answer is no.
Meanwhile, please note that US Debt Now Grows by $1 Trillion Every 150 Days.
US national debt just topped $37 trillion and is growing fast.
Also, please see my August 23, 2025 post: What Do the Technical Charts Suggest about Long-Term Bond Yields?
