Trump Calls for 3% Interest Rate Cut, Fed Unlikely to Comply

President Donald Trump has once again criticized Federal Reserve Chairman Jerome Powell, asserting that the Fed's interest rates are too high. According to Trump, the current rates are at least 3 percentage points higher than they should be. Trump made this statement on his Truth social website, emphasizing that the high rates are costing the US economy significantly in refinancing costs. He claimed that the Fed could save Americans approximately $800 billion by quickly lowering its overnight funds rate, which is currently at 4.33%.

Trump's demand for lower interest rates is not a new stance. He has been vocal about his dissatisfaction with Powell's policies, particularly since the tariff war began. Trump has repeatedly urged Powell and the Federal Open Market Committee to lower interest rates to reduce the government's debt burden. However, Powell has shown no signs of yielding to Trump's pressure. According to Polymarket, there is a 95% chance that the Fed will ignore Trump's demands this month.

If Powell continues to maintain the current interest rates, Trump's options are limited. One option is to wait for Powell's term to end in early 2026, at which point Trump could appoint a new Fed chairman. However, this would require a lengthy wait. Another option is to attempt to remove Powell from his position before his term ends. Last week, Trump called for Powell to resign immediately, following a call from the administration's top housing regulator to investigate Powell for alleged political bias and deceptive testimony.

Under US federal law, the president can only fire the Fed chair "for cause," which is widely interpreted to mean specific misconduct, not policy decisions. In May, the US Supreme Court reaffirmed this precedent, limiting the president's ability to remove the top central banker. Trump has hinted at having two or three candidates in mind to succeed Powell, including Treasury Secretary Scott Bessent and National Economic Council Director Kevin Hassett. However, appointing a new Fed chairman who is seen as aligned with Trump's interests could undermine the Fed's nonpartisan image.

Trump is reportedly considering naming a "shadow chair" to exert more influence over the Fed until Powell's term ends. This move could increase volatility in the stock market, particularly affecting financial institutions whose profit margins on loans might be squeezed by lower interest rates. Additionally, financial ETFs could experience fluctuations due to changing investor sentiment on the financial sector's profitability. While lower rates might boost lending and economic activity, they could also pressure banks' net interest margins, impacting their stock performance.