President Donald Trump is losing his own battle to cut interest rates, as borrowing costs climb despite his repeated demands that the Federal Reserve slash its benchmark rate. Trump has long vilified high rates as an affront to the size and strength of the U.S. economy, arguing that America deserves the cheapest borrowing costs in the world and calling rate cuts “Rocket Fuel!” for growth and housing affordability.
But since the war in Iran began at the end of February, borrowing has become more expensive, leaving fewer families able to afford mortgages or auto loans. The government is squeezed too: it has spent $827 billion so far this fiscal year to service the national debt, more than it has devoted to national defense, according to an analysis by The Associated Press.
The scope of the problem became clear this past week when Kevin Warsh, the Fed chair picked by Trump, said in his second press conference on the job that inflation continues to run hot but offered no clear guidance on how to fix the problem. Rates on 30-year U.S. Treasury bonds hit their highest levels in nearly two decades, the exact opposite of what Trump pledged to voters. The 10-year Treasury note saw its yield shoot above 4.7% on Friday, surpassing what the president inherited when he returned to the White House last year.
Trump has largely ignored the jump in interest rates and portrayed the economy as booming, even though the government recently reported that the annual growth rate for the prior three months was a sluggish 1.5%. “We have the most successful environment that we’ve ever had,” Trump told his Cabinet on Friday. “There’s never been anything like it from the standpoint of investment into our country.” Neither Trump nor Treasury Secretary Scott Bessent discussed interest rates during the public portion of the meeting.
White House spokesman Kush Desai said the end of the Iran war would ultimately reduce energy costs and allow the Fed to reduce rates. “Oil prices, and thus overall inflation, will plummet again when President Trump forces a successful resolution with Iran, further paving the way for additional interest rate cuts by the Federal Reserve,” Desai said.
The prospect of higher borrowing costs has become troublesome for Republicans in the November midterm elections, as Trump’s own policies helped drive the increase. His tariffs that began last year caused rates to jump so quickly that he backed off and reformulated them. Bonds financing artificial intelligence data centers also appear to have helped push up interest rates, and the Iran war has fueled rising oil prices.
Voters care more about whether their incomes are outpacing inflation than about headline growth, according to research released in June by Georgetown University’s Juan Felipe Riano and the University of California, Berkeley’s Francesco Trebbi. “It cut against Democrats in 2024, and if prices and borrowing costs keep outrunning wages into the fall, the same logic points at Republicans now,” Riano told the AP.
Housing affordability has been a sore point. The administration directed Freddie Mac and Fannie Mae, the two mortgage firms under government conservatorship, to buy at least $200 billion in home loans to bring down mortgage rates. Republicans had hoped Trump would sign a bipartisan housing bill as mortgage rates fell below 6%, but Trump called the bill a “big yawn” and allowed it to become law without his signature. Freddie Mac said Thursday that 30-year rates were averaging 6.66%, essentially unchanged from a year ago.
Markets do not expect rates to drop before the election. Warsh, the Fed chair since May, has said he is content to let financial markets do more to set rates. “Markets reflect the higher inflation, policy uncertainty,” said John Silvia, CEO of Dynamic Economic Strategy. “They are the product of events.” Warsh on Wednesday portrayed that as positive: “Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit. This is, in my view, a change for the better, and we are just getting started.”
The next Fed meeting on rates will conclude on Sept. 16. Markets currently expect Fed officials to vote to raise rates in order to reduce inflationary pressures, according to CME FedWatch.
Sources: AP News via KTAR, Reuters, CNBC