Trump Advocates 325% Rate Cut to 1% Amid Market Skepticism

The federal funds rate currently stands at 4.25%-4.50%, but Donald Trump has advocated for a reduction to just 1%. Such a drastic cut would require a significant move beyond the Federal Reserve's typical increments, which are usually a quarter point at a time. The last time the Fed cut rates by half a point was in September.

Wall Street analysts are skeptical about the feasibility of such a drastic rate cut, as it would likely trigger immense turmoil in financial markets and the economy. Jeffrey Roach, chief economist at LPL Financial, described the idea as "ludicrous" and warned that cutting rates too low, too prematurely, or too early could have unintended consequences. He explained that long-term Treasury yields would spike as bond investors price in higher expectations for inflation, raising borrowing costs for consumers and businesses.

Historically, a rate as low as 1% is typically associated with economic emergencies, such as the COVID-19 pandemic or the Great Financial Crisis. Therefore, a rate cut to 1% could shock businesses into wondering if another calamity is lurking around the corner, prompting them to hunker down and wait rather than expand. Roach warned that businesses might become more concerned about what such a signal implies, leading to reduced capital expenditure and operational expansion.

A White House spokesman pointed to Trump’s previous comments that the Fed could and should raise rates again if inflation spikes after cutting them. Roach believes there is room for rates to eventually drop to about 3.5% by the end of 2026 if inflation stays under control. He also criticized Powell for not raising rates soon enough when inflation surged after the pandemic.

Infrastructure Capital Advisors CEO Jay Hatfield also accused Powell of gross incompetence for being too late to raise rates but blasted the idea of the Fed slashing rates to 1%. He argued that while Treasury yields would initially drop in the immediate aftermath of a cut to 1%, once inflation indicators start pointing higher, the fed funds rate would go back up to 4% to shrink the money supply, sending the 10-year yield to about 5%. After a mini-recession or a big pullback, the yield would end up around 3.75%.

Hatfield added that a fed funds rate around 2.75%-3% wouldn’t stoke inflation or send the economy into a downturn, but keeping rates where they are now would trigger a recession. A 1% rate, however, would require a massive expansion in the money supply, leading to double-digit inflation. He warned that such a move would be "horrible economic policy."