(Kitco Commentary) - Aside from trade wars, one of the Trump administration's favorite themes is to pressure the Federal Reserve, or precisely its chief Jerome Powell, to cut interest rates as soon as possible. A key motivation behind this is that doing so would reduce the enormous cost of servicing the U.S. national debt.
As to exactly how much, in June, Trump mentioned that “the government must refinance $9 trillion in debt coming due this year.” If his calls are heeded and three percentage points cut rates — from the current 4.50% to 1.50% — the U.S. Treasury could potentially save billions of dollars.
While this may sound reasonable, there is a fundamental problem: reducing the cost of debt is not part of the Fed's job. The central bank's dual mandate is to maintain price stability and promote maximum employment. And right now, uncertainty on both fronts makes it far from clear that cutting rates is warranted.
Starting with inflation, there is growing concern that June's consumer price data will show a pickup, as businesses begin to pass on the higher costs of imported goods resulting from tariffs. Worse, inflation could gradually accelerate as the year progresses, and the stalemate in trade negotiations does not help here.
Against this backdrop, it becomes clearer why the Fed is reluctant to lower interest rates and continues to adopt a wait-and-see stance. The central bank seems wary of repeating the mistakes of the 1970s, when rate cuts under presidential pressure led to a decade of high inflation.
But what if Trump gets his way and Powell resigns?
If a more accommodative figure replaces Powell, most economists agree that, beyond the risk of a pickup in inflation, the US dollar could weaken, just as the Turkish lira did. More worryingly, there could be a massive sell-off in Treasuries, especially long-term bonds, pushing yields higher (the opposite of what Trump intends).
As a result, the S&P 500 index and the Dow Jones index could also come under pressure. On the other hand, gold and Bitcoin could benefit as a hedge of sorts. We already saw a similar scenario in April. At that time, Trump seemed to backtrack on his attacks on Powell... but now, we're back to the same point.
In short, Trump's campaign against Jerome Powell doesn't have much upside for either the economy or the financial market. Ironically, even if interest rates are cut significantly, it may not actually reduce the cost of debt. In fact, we saw it last November: rates fell, but Treasury yields continued to rise.