Will Trump compel the Fed to cut interest rates?

The possibility that the central bank will be forced into reckless interest rate cuts by Donald Trump is being overlooked by the markets

This shouldn't have been shocking, but the inability to predict what Donald Trump will do next is rattling markets more and more.

Trump's greatest political talent is his ability to persuade a large number of people that he will be beneficial to them despite the fact that his policies are obviously incongruous and that there is no good reason to believe that he will stick with the ones that they particularly like. Apart from the conviction that the president's authority should be unbridled, it is difficult to identify any recurring ideology.

Forecasts for the upcoming years are therefore even more speculative than usual, so we shouldn't place a lot of trust in them. However, we should not underestimate the risk of Trump enacting a significant interest rate cut.

Unusually reliable.

Trump's preference for lower interest rates is evident from his career; this is one of the few instances in which his behavior and remarks are nearly always the same.

After all, he doesn't seem like the kind of person who believes in sound money. He is a real estate developer who has a history of taking on as much debt as possible, declaring bankruptcy, and repeatedly receiving loan forgiveness.

When Trump first ran for president in 2016, he claimed that the Fed had created a "false economy" by keeping interest rates too low to aid Barack Obama. That changed once they were in charge.

He referred to the central bank as his "biggest threat" and criticized it for acting too quickly when it began raising interest rates in 2018.

He stated during his campaign that rates ought to be lower this time, and he has been increasing that pressure ever since he returned to the White House.

Will the Fed give in to pressure?

Although it is ostensibly independent, political pressure can still affect the Fed. Just as it did in 2019, it will give way to this.

They will give Trump lower rates, but not recklessly (by their easy-money standards), since it is assumed that the governors are moderately responsible.

Nonetheless, it is quite possible that Trump will call for far more drastic cuts if the US economy begins to deteriorate and his approval ratings follow suit.

In his previous term, the highest rates he received were 2.5 percent, and they were frequently zero.

It may not matter if the current governors agreed to that; if not, Trump might try to replace them.

The president cannot fire Fed Chair Jerome Powell, who has stated that he will not resign. However, considering the stance Trump is taking on other matters, I would find it extremely reassuring that he cannot use legal arguments to replace the entire board with himself, Elon Musk, or whoever else happens to be in favor.

The typical strategy in the event of an aggressive rate cut would be to hold long-term bonds, as their price fluctuates more in response to a change in rates.

However, markets may be further shook and the yield curve may steepen if Trump exerts pressure on the Fed.

This is another reason why our strategic portfolio only consists of short-term bonds, though I do not anticipate it happening unless the US economy declines significantly. Yields over the long run are insufficiently high for this risk.

US Treasury Department yield curve.