WSJ Editorial Board: Trump’s Call for Rate Cuts Puts Either his Credibility or Knowledge into Question

Donald Trump’s push for lower interest rates has reignited a debate over the appropriate course of Federal Reserve policy at a time when inflation remains above target. The Wall Street Journal’s editorial board recently criticized Trump’s call for easing, arguing that it contradicts economic fundamentals, particularly given that consumer prices are still rising.

This perspective aligns with broader market sentiment, as bond yields surged following the latest inflation report, signaling investor skepticism that the Federal Reserve will cut rates anytime soon.

The Inflation Reality vs. Trump’s Monetary Policy Stance

Trump’s renewed demand for rate cuts came on the same day that January’s Consumer Price Index (CPI) report revealed a 0.5% monthly increase, pushing the annual inflation rate back up to 3.0%. Core CPI, which excludes food and energy, climbed 3.3% year-over-year, further reinforcing concerns that price pressures remain persistent.

The Wall Street Journal argues that the inflation trend contradicts Trump’s call for immediate rate cuts, as lower rates could add more fuel to price pressures. Historically, easing monetary policy when inflation is still above the Federal Reserve’s 2% target risks prolonging inflationary episodes and eroding purchasing power.

Trump’s position is likely influenced by political and economic considerations. A rate cut could support stock market gains and improve economic sentiment ahead of the 2026 election cycle. However, Federal Reserve Chair Jerome Powell has emphasized a data-dependent approach, indicating that rate cuts will only come when inflation is firmly under control.

The Role of Tariffs in the Inflation Equation

A key point of contention in the Journal’s critique is the potential inflationary impact of Trump’s proposed trade policies, particularly reciprocal tariffs. Higher tariffs on imports generally raise input costs for businesses and consumer prices, potentially negating the deflationary effects of monetary tightening.

If Trump follows through with broad tariffs on China, the European Union, or other trading partners, it could further complicate the Federal Reserve’s job. The combination of protectionist trade policies and premature monetary easing could risk a scenario in which inflation reaccelerates, forcing the Fed to reverse course and tighten policy again.

This dynamic played out in 2018-2019, when Trump’s first wave of tariffs on China contributed to rising costs for American manufacturers and consumers. While the Fed did cut rates in 2019 amid slowing global growth, it was cautious about easing too aggressively due to inflation concerns.

Market Reaction: Rising Treasury Yields and Fed Patience

The bond market swiftly reacted to the latest CPI report and Trump’s comments, with the 10-year Treasury yield jumping to 4.63% as investors recalibrated their expectations for Fed policy. Higher yields reflect growing skepticism that the Fed will cut rates anytime soon, as persistent inflation keeps policymakers cautious.

Market-based expectations for rate cuts have shifted significantly in recent weeks:

- Futures markets now price in the first rate cut for September 2025, a notable delay from the previous expectation of June.

- The likelihood of multiple rate cuts in 2025 has decreased, with some analysts, including those at Barclays and Bank of America, even warning that the Fed may not cut rates at all this year if inflation remains sticky.

- Some investors are beginning to entertain the possibility of rate hikes, though this remains a low-probability scenario barring a sharp acceleration in inflation.

Powell and other Fed officials have largely dismissed political pressure, reaffirming their commitment to price stability. The latest inflation data suggests that the Fed’s higher-for-longer stance is warranted, reinforcing its cautious approach.

Lessons from 2024: The Impact of Premature Rate Cuts

The Wall Street Journal also argues that the real policy mistake was the Federal Reserve’s decision to cut rates too soon in late 2024, which contributed to higher long-term yields and failed to decisively bring inflation under control. While the Fed did not explicitly reduce the federal funds rate in 2024, its dovish pivot—signaling multiple cuts for 2025—may have eased financial conditions too quickly, allowing inflation to remain elevated.

This experience serves as a cautionary tale for policymakers. If the Fed were to cut rates prematurely again, it could risk another wave of inflation, forcing a more aggressive response later. Given this backdrop, Powell and the FOMC are likely to remain patient, ensuring that inflation is clearly and sustainably moving toward 2% before easing policy.

Implications for Investors and the Broader Economy

Trump’s call for rate cuts, while politically motivated, does reflect a broader desire for economic stimulus. However, the market’s response suggests that investors see more risks than rewards in premature easing.

1. Stock Market Volatility

- The prospect of delayed rate cuts could dampen equity market enthusiasm, particularly for interest rate-sensitive sectors such as technology and real estate.

- However, if inflation remains under control and economic growth holds steady, cyclical sectors such as energy, industrials, and financials could benefit from a prolonged higher-rate environment.

2. Fixed Income Repricing

- Bond yields are likely to remain elevated as the Fed stays cautious, creating headwinds for long-duration Treasuries and interest-sensitive corporate debt.

- Short-duration bonds may present a more attractive risk-reward balance in this environment.

3. Consumer and Business Borrowing Costs

- Higher interest rates will continue to pressure mortgage rates, credit card rates, and business borrowing costs, which could slow economic activity over time.

- The housing market may see prolonged headwinds as mortgage rates remain elevated, dampening affordability and homebuyer sentiment.

4. Currency Markets: Dollar Strength and Trade Risks

- A stronger U.S. dollar, driven by expectations of higher-for-longer rates, could weigh on multinational earnings and exports.

- Trade tensions and tariffs could add further uncertainty, impacting global supply chains and inflation dynamics.

Conclusion: Trump’s Calls for Easing Unlikely to Sway the Fed

While Trump’s push for rate cuts may appeal to political and market interests, the economic data does not currently support an imminent easing cycle. With inflation still above target and the job market holding firm, the Federal Reserve has little incentive to move quickly on rate cuts.

The Wall Street Journal’s critique underscores the risk of premature monetary easing in an inflationary environment, particularly when coupled with expansionary fiscal policies or trade restrictions.

For investors, the key takeaway is that interest rates are likely to stay higher for longer, requiring a recalibration of expectations across asset classes. Until inflation shows a consistent and sustained decline toward 2%, the Fed is unlikely to take the kind of action that Trump is advocating.