Introduction to the Issue
As part of his campaign to get rid of Jerome Powell, President Donald Trump blamed the chairman of the Federal Reserve for the fact that the country lost "hundreds of billions of dollars" by not lowering the interest rates.
The President’s Claims
"You cost the United States a fortune and continue to do so" Trump posted on social media last month. "You should reduce this sentence by a lot. Hundreds of billions of dollars are lost." In the same contribution, Trump accused the Fed Board and said: "If you did your work properly, our country would save trillion dollars of interest costs. We should pay 1% interest or better!"
The Focus on Interest Costs
Trump’s focus on interest costs comes at a time of renewed attention to the national interest payments in the country for the constantly growing federal debt. Interest payments in this financial year are for the first time in the history of the country over $1 billion. The president has just signed a bill which is expected to increase the deficit in the next decade by more than $3 trillion and push the interest rates even higher.
The Impact of Interest Rates
But even if Trump puts the Fed under pressure to reduce interest rates, this cannot make the country’s interest rate pollution significantly easier, experts said. The Federal Funds kit is just one of the factors that affect interest rates for the federal debt, which consists of a mixture of short-term, medium-sized and longer financial papers. "It seems to be a lighter lever to draw for those who want to have an impact on interest costs either for the interest costs for federal debt or economic growth," said an expert.
The Rise of Interest Rates
What is undeniable is that the interest rate of America has risen in recent years, partly due to the growing debts of the nation and partly because the interest rates have increased after a period of super-low interest rates when the nation fought high inflation at the beginning of the decade. The United States triggered interest payments of $346 billion in the 2020 financial year. This number has increased to $952 billion in the current financial year and will probably exceed $1 trillion in the coming year.
The Growing Burden of Interest Payments
Interest payments are now the second largest output category in the federal budget, which exceeds Medicare and Defense in the 2024 financial year and only leaves behind social security. Around 18 cents of each dollar tax revenue are currently being paid for the payment of interest for the debts. At the end of the next decade, this number will jump to about 25 cents.
The Limitations of the Federal Reserve
While the reduction of the Federal Fund can reduce interest rates for short-term securities, this cannot reduce interest rates for 10-year or 30-year government bonds. In fact, for several reasons, a sharp reduction can increase long-term interest rates, including a steep installment reduction, the inflation could advance or investors to switch to long-term securities to block higher interest rates. "The Federal Reserve has only so much authority to reduce these interest rates," said an expert.
A More Efficient Way to Reduce Interest Payments
If Trump was really interested in reducing interest payments, there is a more efficient way to do this, experts said. He could work to reduce the annual deficit – although this would probably contain some politically unusable changes to taxes and expenses, they said. "If your concern is the hundreds of billions of dollars that we expand to the deficit from higher interest costs, the solution is to issue guidelines that have deficit reductions and do not increase the deficit."
