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Key Takeaways
- President Donald Trump has pressured the Federal Reserve to lower its benchmark interest rate, saying doing so would help push down mortgage rates and interest the U.S. pays on its national debt.
- Mortgage rates are tied to inflation expectations, which could actually rise if investors believe the Fed is lowering its rate for political reasons.
- The government’s long-term borrowing costs have only increased since the last time the Fed cut interest rates, casting doubt on the idea that cutting the fed funds rate would help the federal budget.
President Donald Trump’s efforts to pressure the Federal Reserve into lowering its benchmark interest rate could result in higher borrowing costs for homebuyers and the federal government, experts say.
Since he took office, Trump has pushed the central bank to cut its key fed funds rate, which it has held at a higher-than-usual level all year in an effort to quell inflation. Trump has blamed the high fed funds rate for keeping interest rates elevated on the U.S. national debt, putting the government’s budget farther into the red than it otherwise would be, and for keeping rates on mortgages high, pushing homebuying costs out of reach for millions.
However, economists believe that his attempted solution could make both problems worse. Here’s how Trump’s push to lower rates could have the opposite of its intended effect.
The Fed Only Controls Short-Term Interest Rates
The Federal Reserve sets the fed funds rate, which determines the interest rates banks pay to borrow money from one another overnight. All kinds of other loans are tied to the fed funds rate, including credit cards and car loans.
Rates for 30-year mortgages, however, are not directly linked to the fed funds rate. Instead, they’re tied to yields on 10-year Treasury notes issued by the U.S. government. Those yields are set by financial markets as traders buy and sell treasuries, with prices fluctuating based on how investors assess the risks involved. Inflation expectations heavily influence the yields: Generally, the higher the inflation forecast is for the future, the higher the yields go on 10-year Treasurys.
“If the market smells rising inflation, it’s going to push long-term interest rates higher and not lower,” said Jon Hilsenrath, senior advisor at financial services company StoneX.
In other words, if financial markets expect higher inflation in the future, mortgage rates are likely to rise.
Many experts have raised this concern, including staff at the National Association of Mortgage Underwriters.
“A hasty or ill-timed rate cut, especially one perceived as politically motivated, could do more harm than good—raising long-term borrowing costs, undermining financial confidence, and complicating the path to sustained economic growth,” the organization wrote in an unsigned website post in April.
Trump Threatens The Fed’s Independence
The Federal Reserve is the institution responsible for keeping inflation under control, and its main tool for doing so is the fed funds rate. When inflation is too high, the fed raises the fed funds rate, pushing up borrowing costs on short-term loans, slowing the economy and allowing supply and demand to rebalance. That’s what it did starting in 2022 during the post-pandemic surge of inflation.
The more investors believe the Fed will succeed at keeping inflation running at its target of a 2% annual rate, the lower rates will be on long-term loans. But if people lose faith that the Fed will keep inflation under control, those rates could rise.
Even before Trump was elected, economists sounded the alarm that Trump’s pressure on the Fed to lower interest rates could reduce its independence and, therefore, its credibility. Those concerns have only grown as Trump’s rate-cut pressure has intensified, most recently with his dismissal of Fed Governor Lisa Cook.
“People are paying too high an interest rate,” Trump said this month in a cabinet meeting. “That’s the only problem with housing. We have to get the rates down a little bit.”
Both ideological allies and opponents of Trump have raised concerns about the Fed’s independence, including Michael R. Strain, director of policy studies at the conservative American Enterprise Institute think tank.
“Eroding central bank independence will make investors, businesses, and households less confident that the Fed will be able to keep inflation low and stable because they will expect that the president will be able to bully the Fed into keeping interest rates lower than is merited, juicing demand and creating inflationary pressure,” Strain wrote in August. “Higher expected future inflation will put upward pressure on long rates.”
What Happened Last Time The Fed Cut Rates?
Recent experience casts doubt on the idea that a lower fed funds rate would push down long-term borrowing costs. In late 2024, the Fed cut its benchmark interest rate by an entire percentage point over the course of four months, at a time when it looked like inflation was finally simmering down to the Fed’s goal.
Since then, yields on 10-year Treasurys and mortgage rates have hovered around the same range. Yields on 30-year Treasury bonds, which reflect investor concerns about inflation and the government’s ability to pay its debts, have neared 5% in recent days, a level not seen since 2006. That’s especially problematic for the federal budget since the Treasury Department is the one paying interest on those bonds.
Future rate cuts could also have the opposite of the desired effect, especially if markets believe the Fed is making the cuts for political reasons.
“The President might get what he wants and get a much lower short-term interest rate,” Hilsenrath said. “But long-term interest rates on federal government debt could increase.”
