Trumping the Fed & Interest Rates

President Trump is exerting pressure on Federal Reserve Chair Jerome Powell to aggressively cut the Fed's policy interest rate. During a Teleconference with the World Economic Forum in Davos on January 23, 2025, he boldly stated, "I'll demand that interest rates drop immediately, and likewise, they should be dropping all over the word." 

Fed, an Independent Government Agency 

First, the Federal Reserve is an independent entity, a central bank, free from political influences. The Fed reports to Congress and doesn't take orders from the executive branch or the president.

He is doing so despite the fact that the Fed is yet to achieve its 2 percent inflation target. He is also doing so despite the upward inflationary pressure that his proposed economic policy mix of sharp import tariff increases, massive tax cuts, and the deportation expense of undocumented immigrants will exert on inflation.

A key objective for Presidents and Federal officials is to maintain the people's confidence. When it comes to interest rates, they function as a free market. Investors who purchase US Treasury bonds, mortgage securities, and debt instruments set the free market aspect of interest rates. Anything undermining the investors' confidence in the US Treasury can be detrimental to their values, translating to higher rates. 

Furthermore, there is a false perception that the Fed controls the direction of interest rates. The Fed controls its short-term rates, which are the Fed Funds and the Discount rates, but they do not set Bond Yields/Rates, which are all free market rates. 

The media often confuses the public by projecting the Federal Reserve (Fed) as the determining factor in the direction of interest rates. However, interest rates are influenced by the supply and demand for bonds & debt markets as a free market. 

Case in point. After the recent Rate Fed Rate Cut occurred on September 19, 2024. We saw the longer-term Treasuries & Mortgages move up right away. The 10-year Treasury Bond Yield/Rate (benchmark) and Mortgage Rate immediately increased after the Sep 2024 Fed rate cut for approximately 2 months. The intermediate and long-term Treasuries ended up much higher after the Fed cut. See Chart below.



10-Year Treasure Note Yields (Rate)