Yesterday, U.S. President Donald Trump stated that he would demand that the Board of Governors of the Federal Reserve System lower interest rates. Mr. Trump’s off the cuff remarks reminded me of a scene from “Air Force One” where Harrison Ford’s character during a speech made in a central Asian country shared a position on foreign policy, one that signaled a shift in thinking. One of his secretaries pulls him aside and reminds him that anything he says is public policy.
Mr. Trump’s demand for lowered interest rates creates a narrative that he may be willing to test the separation of powers. As president, Mr. Trump’s influence over interest rates, over the cost of money, is minimal. Congress, under the Constitution, has a duty to regulate the value of money and via the Federal Reserve Act has delegated a significant portion of that duty to America’s central banking system. Mr Trump on this and other occasions has signaled his desire to insert himself into the process for determining the value of money.
Should Mr. Trump’s tactics be surprising? No. Presidents are expected to use the bully pulpit to persuade the public to get line with their policy positions. The bully pulpit in the form of briefs, petitions, executive orders, conferences, meetings, etc., is used to persuade Congress and the Court to insert the Executive’s preferred policy into legislation and court opinions. Executive power under the Constitution may be limited, but a President’s ego and vision are not.
The President has a few weapons that he can use to get his way on rates. First, he can appeal directly to Jerome Powell, chairman of the Board of Governors of the Federal Reserve System. He can argue that reducing the interest rate on reserve balances, the discount window, and other short-term rates can go a long way (maybe) to helping consumers.
Second, Mr. Trump could get behind HR 146, a bill that would eliminate the payment of interest on reserve balances. By eliminating a floor on short-term interest rates, Mr. Trump, with the help of the Congress, could not only do an end-around the Federal Reserve, but make the President a temporary partner in the regulation of the value of money.
Third, Mr. Trump can propose a budget that eliminates the demand for borrowed money. His budget would have to describe how the federal government could function effectively with less money thus reducing the need to issue more debt. A reduced need on the part of government to borrow money should lead to lowered interest rates.
Finally, Mr. Trump could appeal directly to the American voter, imploring them to call their senator or representative and requesting Congress put pressure on the Federal Reserve to reduce rates.
A problem Mr. Trump has to address is the inconsistency in his messaging on interest rates and the dollar. On the one hand, he wants to tackle inflation but on the other hand, he does not want the banking system to raise rates to offset losses in spending power.
Also, I don’t believe the markets are yet clear on whether Mr. Trump wants a weak dollar or a strong dollar. A weak dollar may encourage foreign purchases of American exports, but domestic consumers may be hampered by increases in price for foreign-produced alternatives combined with potentially higher tariffs.
A strong dollar would provide domestic consumers flexibility in purchasing decisions where they could purchase foreign product on the cheap. The downside is that American exporters may have a harder time selling their product abroad.
My advice to the President: This is not a hill that you want your economic policies to die on. To demand lower interest rates means accepting the consequences of a weaker dollar and when combined with tariffs, ensuring the wrath of the voter in 2026.
My counsel to traders, while the President’s words may signal a policy direction, stick to the “four corners” of a written document when determining the impact of policy on your trade.
Alton Drew
24 January 2025
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DISCLAIMER: I am not a financial adviser. These blog posts are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
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