The Trump Administration Push for Lower Rates vs. The Need for Sustained Higher Rates to Contain Inflation

Just a few weeks into President Trump's return to office, his administration is making its stance clear: they want lower interest rates. The rationale is simple—cheaper money fuels economic expansion, supports businesses, and keeps the stock market soaring. However, the reality we face today is far more precarious than during his first term, requiring a careful balancing act to ensure economic stability. Inflation remains persistent, and premature rate cuts could trigger a resurgence of price pressures that would be difficult to contain. The Federal Reserve must resist political pressure and keep rates elevated for an extended period to prevent a repeat of past inflationary spirals.

The Political and Economic Case for Lower Rates

Trump has always been vocal about his preference for lower interest rates. During his first term, he repeatedly pressured the Federal Reserve to cut rates, arguing that high borrowing costs stifle economic growth. Now, with his second term underway, his administration is again pushing for easier monetary policy, citing the need to boost growth, support job creation, and enhance American competitiveness.

At first glance, this approach appears logical. Lower rates make it cheaper for businesses to borrow, invest, and expand. They also encourage consumer spending by reducing the cost of mortgages, auto loans, and credit card debt. Lower rates could also provide relief to government borrowing, as rising interest payments on the national debt have become a growing concern. However, the broader economic context suggests that cutting rates too soon would be a dangerous move.

Why Rates Must Stay Higher for Longer

While the desire for lower rates is understandable, the conditions we face today are vastly different from those in the past. Inflation, though somewhat tempered compared to its peak, remains well above the Federal Reserve’s 2% target. Cutting rates too early would reignite inflationary pressures, undoing the hard-fought progress made over the last two years.

The inflationary cycle of the past decade was fueled by years of ultra-loose monetary policy, supply chain disruptions, and excessive government spending. To combat inflation, the Federal Reserve raised interest rates aggressively, helping to bring price pressures under control. However, the underlying forces that drove inflation are not entirely resolved. Wage growth remains robust, supply chains are still recalibrating, and geopolitical tensions continue to threaten commodity prices. A premature rate cut could send the wrong signal, leading businesses and consumers to believe that inflation will remain elevated, which in turn could create a self-fulfilling cycle of rising prices.

Higher interest rates also serve a crucial role in maintaining financial discipline. When money is too cheap, speculation runs rampant, leading to asset bubbles and unsustainable debt accumulation. The Fed’s decision to keep rates elevated helps restore some balance to the economy, encouraging prudent financial behavior and ensuring that capital is allocated efficiently. A return to near-zero rates, as Trump’s administration may prefer, would risk undoing these gains and setting the stage for another boom-and-bust cycle.

The Impact of Lower Government Spending Due to DOGE

One critical factor that must be considered in this debate is the role of fiscal policy. While monetary policy plays a key role in controlling inflation, government spending also significantly impacts the broader economy. Trump’s administration has signaled its intention to rein in spending through the Deficit and Overspending Government Elimination (DOGE) initiative, a policy aimed at cutting wasteful expenditures and reducing the budget deficit.

The effects of DOGE will be twofold. On one hand, reduced government spending will remove excess dollars from circulation, helping to contain inflation. This could, in theory, create conditions that support lower interest rates over time. However, the transition period could be painful, as certain sectors reliant on government contracts and subsidies may experience economic contraction. Additionally, if spending cuts disproportionately affect lower-income households, it could lead to reduced consumer demand, which may slow economic growth.

Despite the fiscal contraction, the Federal Reserve cannot rely solely on government spending cuts to do the heavy lifting. The process of disinflation is fragile, and any misstep could send the economy into turmoil. Cutting rates too soon, even with tighter fiscal policy, could still unleash new inflationary pressures, especially if consumers and businesses respond to lower borrowing costs by ramping up spending.

The Global Context: Why The U.S. Can’t Afford Cheap Money

The United States does not operate in isolation. Global economic trends, trade dynamics, and currency valuations all play a role in shaping monetary policy decisions. If the Federal Reserve moves to cut rates too quickly while other major central banks keep their policies tight, the U.S. dollar could weaken significantly. A weaker dollar may boost exports in the short term, but it would also make imports more expensive, driving up inflation.

Furthermore, the ongoing global shift toward de-dollarization means that the U.S. must tread carefully. Many countries are exploring alternatives to the dollar for trade and reserve purposes, and a perception of economic mismanagement could accelerate this trend. If investors lose confidence in the dollar’s stability, it could trigger capital flight, adding another layer of risk to an already fragile economy.

The Market’s Expectation vs. Economic Reality

Financial markets are notoriously forward-looking, and many investors are already pricing in rate cuts for later this year. However, the Federal Reserve must make decisions based on economic fundamentals, not market expectations. If the Fed caves to political pressure and cuts rates prematurely, it risks creating an artificial rally in asset prices that is detached from economic reality. This could lead to another speculative frenzy, similar to what we saw during the era of cheap money in the 2010s.

Instead, the Fed should communicate clearly that while rate cuts may be possible in the future, they will only happen when inflation is sustainably back to target and the labor market shows signs of rebalancing. A cautious approach will help maintain credibility and ensure that monetary policy remains an effective tool for long-term stability.