Trump wants lower interest rates. His tariffs won’t help

Donald Trump wants the Federal Reserve Board to cut interest rates. After an unexpected rise in inflation in January, markets are now saying he may have to wait until December to get one.

Given his policy agenda, the wait might be even longer.

Before the release of the US inflation data, which showed a year-on-year increase in the headline rate of 3 per cent, and a 3.3 per cent increase in “core” inflation (which excludes volatile energy and food prices), Trump posted about interest rates on his Truth Social platform.

Less than an hour after Donald Trump declared that lower interest rates would go “hand in hand” with his tariffs, poor US inflation data saw the prospects for rate cuts diminish.Credit: AP

“Interest Rates should be lowered, something that would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!,” he wrote.

The inflation data was released less than an hour later and because it showed inflation well above market expectations – the month-on-month headline rate of 0.5 per cent was above the consensus forecast of 0.3 per cent – led to an immediate re-pricing of the expectations for rate cuts.

Where previously futures markets had priced in two 25 basis point cuts for 2025, starting as early as mid-year, investors now expect only one cut in December. That shift in expectations led to a fall in US shares prices and a rise in bond yields.

‘Interest Rates should be lowered, something that would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!’

Donald Trump on Truth Social

Speaking before the House Financial Services Committee in Congress later on Wednesday morning, Fed chairman Jerome Powell said the data showed that, while the central bank had made substantial progress towards bringing inflation under control, there was still more work to do.

“I would say we’re close, but not there on inflation,” he said.

Asked about Trump’s post, he said people could be confident that the Fed’s people would continue to keep their heads down, do their work and make their decisions based on what’s happening in the economy. Statements made by elected officials would not influence the Fed, he said.

Their actions, however, might.

Trump’s post was peculiar. Lower interest rates don’t go hand in hand with tariffs.

Indeed, because they increase costs to businesses and consumers of the country that imposes them, tariffs are inflationary and therefore more likely to lead to increases in interest rates, not decreases.

For example, the 25 per cent tariffs Trump has announced on aluminium and steel imports are already leading to increased prices for those metals within America. US commodity buyers are paying a significant premium over the prices European traders are paying for aluminium, steel and copper (which Trump has indicated may be the next metal targeted).

The US buyers are scrambling to stockpile the metals before the tariffs take effect next month, with the premium being paid by US buyers highlighting how the tariffs affect prices.

Net imports supply more than 80 per cent of the US demand for aluminium, roughly half its copper demand and about 30 per cent of its steel consumption, so the import levies will have a significant impact on industry costs, end-user prices and, ultimately, inflation.

‘So far what we’re seeing is a lot of cost and chaos.’

Ford chief executive Jim Farley

Trump has paused his proposed 25 per cent tariffs on all imports from Mexico and Canada which, if imposed, would “blow a hole in the US (auto) industry that we have never seen,” according to Ford CEO Jim Farley.

However, the US president has kept a 10 per cent added tariff (on top of pre-existing tariffs) on all imports from China and, if the US Postal Service and Customs and Border Protection agency can work out how to do it, plans to impose those tariffs on small parcel imports from China currently exempt from duties.

He also plans “reciprocal” tariffs on countries that levy tariffs on imports from the US.

Even if Trump doesn’t follow through with his election promise to put a 60 per cent tariff on China’s exports to the US, the higher tariffs on goods from China would alone add to inflation, as would his threatened tariffs on imports from Europe and elsewhere.

“So far what we’re seeing is a lot of cost and chaos,” car boss Farley said of these early weeks of the administration.

It’s not just tariffs. Trump’s purge of undocumented immigrants from the US and his proposed $US4.6 trillion ($7.4 trillion) in tax cuts for companies and the wealthy would also be inflationary, shrinking the pool of low-cost labour and adding to the spending capacity of wealthier households.

While there’s not much that his administration could do to offset the economic impacts of mass deportations, it could blunt the effects of the tax cuts – an extension of Trump’s 2017 tax package that is set to expire at the end of this year – via massive spending cuts.

The Republicans in Congress have come up with a plan to cut spending by $US4.5 trillion over a decade, which would essentially match the cost of the tax cuts, although not the tax exemption for tips and other concessions Trump promised in his campaign.

Those proposed expenditure cuts aren’t very detailed, although the makeup of US government spending is such that cuts of that magnitude would necessitate big reductions in spending on healthcare and social welfare programs.

Trump’s right-hand billionaire Elon Musk has made it his mission to slash federal government spending. Credit: AP

The plan requires more than $US1.5 trillion of cuts to those programs, which support the poorest households in America, to deliver tax cuts for the richest.

While the Republican plan is to cut $US4.5 trillion from expenditures, the House Republican leaders also want to raise the US debt ceiling by $US4 trillion. The US is currently bumping up against the $US36.1 trillion ceiling, using “extraordinary” measures to keep the government operating within it. Making the Republicans’ fiscal challenge greater is Trump’s desire to increase defence spending.

On the basis of what they have presented so far, it would appear that the House Republican leadership isn’t planning to use the expenditure cuts to reduce America’s swelling debt and deficits – the increase in the debt ceiling they want suggests they expect increased deficits and debt – but to redistribute wealth regressively.

Trump’s Treasury Secretary Scott Bessent has an economic plan he has labelled “3-3-3”. He wants to cut the budget deficit to 3 per cent of GDP, generate 3 per cent GDP growth and lift oil and gas production by 3 per cent.

The budget deficit last financial year was $US1.9 trillion, or 6.4 per cent of GDP, and data released this week shows that for the first four months of this financial year it is running 25 per cent higher than last year, with a deficit of $US840 billion so far and interest costs on the government’s debt that, if they were annualised, would alone account for almost $US1.2 trillion of government spending.

If the Fed keeps US rates higher for longer (bond yields rose in response to the inflation data) Bessent’s deficit and growth goals would be even more challenging, while Trump’s tariffs on steel and aluminium (and perhaps copper) would increase production costs and reduce returns from new investment for the oil and gas sector, which would make that investment less likely.

Trump seems to believe his tariffs should deliver lower inflation, lower interest rates and higher growth. The opposite is more likely.

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