The more Trump talks, the less likely Powell is to cut interest rates

Source: Jinshi Data

As the saying goes, a man's greatest enemy is himself. When it comes to the Fed and interest rates, Trump has certainly made his situation much more difficult.

Trump's repeated attacks on Fed Chairman Powell, including the usual schoolboy-like taunts and insults, have made it almost impossible for Powell and his colleagues to cut short-term interest rates at the meeting in the early hours of the next day Beijing time, even if they wanted to.

Any rate cut would most likely be seen as a capitulation to pressure from the White House.It is hard to imagine how this would have any other outcome than damaging the Fed's reputation and confidence in the U.S. Treasury market. Rumors sparked by Trump's own comments a few weeks ago that he might try to "fire" Powell were enough to cause a bond market crash.

At this stage, financial markets believe that the Fed will not only keep short-term interest rates stable at this week's meeting, but will likely do so at next month's meeting as well. The market believes that the Fed is unlikely to cut interest rates until July, and that it may only cut by 25 basis points at that time.

If that happens, the Fed may need to brace for an escalation in the president’s anger. But the president’s subsequent attacks on the Fed could in turn push out rate cuts further. That’s not because the Fed is stubborn, but because Powell knows he needs to reassure bond investors that an independent Fed will guard their investments and protect the value of their money.

If he can’t do that, Treasuries may not attract as many investors in the future. No one wants to see their money go up in flames.

Ironically, some financial data are starting to move in the direction Trump wants, though perhaps not for the reasons he claims. Inflation expectations, for example, are falling. The bond market’s five-year inflation expectations — the so-called break-even inflation rate — have fallen to 2.33% in recent weeks, a marked improvement from more than 2.6% in February.

The main reason: Trump’s massive tariff move on April 2 has unleashed economic turmoil and uncertainty.

In just a few days, the Atlanta Fed cut its real-time forecast for second-quarter economic growth by more than half, from 2.4% to 1.1%. Manufacturing contracted for a second straight month in April, according to the Institute for Supply Management, though the services sector continued to expand.

The data showing a slowing economy, however, did not do much for the bond market. Trump's angry accusations against the Fed and interest rates, coupled with the fact that he will appoint Powell's successor next year, have made investors nervous. Overseas investors may also be selling bonds for obvious reasons.

The 10-year Treasury yield is currently around 4.33%, and the 30-year fixed-rate mortgage rate, which is closely linked to the 10-year Treasury yield, is 6.76%, higher than it was last summer.

Trump needs this rate to fall sharply. This is key to warming up the housing market, in which many homeowners are refusing to move because they can't find fixed-rate loans like they did before (when interest rates were 3% or 4%).

Analysts at JPMorgan Chase don’t think the housing market will really pick up until 30-year fixed-rate mortgage rates fall to 5%.

For that to happen, the bond market must regain confidence in the Fed’s independence. The last time 30-year fixed-rate mortgages averaged 5%, the 10-year Treasury yield was 2.6%. If Trump wants to do himself a favor, he can stop talking about the Fed.