'Lower the rate': Trump's ultimatum to the Fed explained

USA: On Friday (Sep 4), President Donald Trump threatened to halt US trade with nations with which the United States runs a trade deficit unless the Federal Reserve lowers interest rates. This was a stark escalation of his ongoing pressure campaign against the central bank that arrived hours after a stronger-than-expected jobs report pushed rate hike odds to 60%, according to CNN.

“LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT,” Trump wrote in a post on Truth Social, citing what he claimed was Supreme Court acknowledgement of his authority to do so. “IT’S BETTER THAN TARIFFS! The Fed Board, with its great new leader, must get smart — BE PATRIOTS for a change.”

The threat came shortly after August’s jobs report showed US employers hired 162,000 new workers, which more than doubled what economists had forecast. This figure significantly strengthens the case for a rate hike at the Fed’s upcoming September meeting, as CNN noted. Rate hike odds jumped from 49% to 60% within hours of the report’s release, according to CME FedWatch data.

The US ran a $1.2 trillion (S$1.5 trillion) trade deficit with all trading partners last year, with China the largest individual deficit at over $200 billion, followed by Mexico and Vietnam, according to federal trade data.

The Fed’s signals

Fed Chair Kevin Warsh, Trump’s hand-picked replacement for Jerome Powell, whom Trump repeatedly pressured to cut rates before replacing him, signalled at the Jackson Hole symposium last week that he is open to raising rates if inflation remains elevated. “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” Warsh said, as reported by CNN.

Fed Governor Michael Barr said he is prepared to vote for a rate hike soon if inflation data does not show progress. Governor Chris Waller said he would support a hike if inflation does not eventually slow, though he is willing to wait longer. All eyes are now on the Consumer Price Index report for August due next Friday.

Inflation's Iran connection

As CNN reported, annual US inflation has risen a full percentage point to 3.4% in July since the war with Iran began in February, driven primarily by surging gas prices as oil tankers have been unable to transit the Strait of Hormuz. Supply chain cost increases have compounded the pressure, with many companies signalling further price hikes ahead.

CNN noted that if Trump follows through on his threat to cut off trade, it could push prices even higher by disrupting established supply chains that US businesses cannot quickly replace — potentially inflicting significant damage on both businesses and consumers.

An ongoing pressure campaign?

CNN reported that Friday’s threat is the latest in a sustained campaign against the Fed. Earlier this week, Trump called it “ridiculous” to even discuss raising rates, saying “success in growth does not cause inflation.”

The campaign has also included Trump’s attempt to fire Fed Governor Lisa Cook over unproven allegations of mortgage fraud, which the Supreme Court blocked, and a Justice Department criminal investigation into former Chair Powell that was later dropped, clearing the way for Warsh’s confirmation.

Fed Governor Lisa Cook has not been charged with any wrongdoing.

Netizens react

Reddit responses ranged from economic analysis to dark predictions about the consequences.

“This might be one of the most economically illiterate ideas I’ve ever seen,” one commenter wrote. “Trade policy doesn’t dictate the mandate of the Fed, and cutting off trade would be a massive self-inflicted wound. It is virtually impossible for a country with a global reserve currency to run a current account surplus.”

Another raised concerns about the Fed’s credibility: “If the bond market thinks the Fed is controlled by this unhinged moron, then treasuries might as well be worthless.”

One commenter framed the situation in the starkest possible terms: “He’s holding a gun to the US economy to pressure the Fed to comply. Abruptly ending trade with all international trade partners would catastrophically seize the US economy, not to mention the effects on global partners. He's threatening to plunge the world into Depression-style recession unless he gets his way.”