Inflation, the job market, and the need for Treasury and Treasury Purchases: How the Fed is selling the stock market and boosting borrowing costs
While Trump wants the Fed to lower interest rates, his own policies could work against that by fueling inflation. The president has threatened widespread tariffs, for example, which could lead to higher prices for consumers. Mass deportations could make it hard to bring prices under control.
The Fed’s projection at their last meeting was for a half-a-percentage point cut, compared to a full-point cut they had previously predicted.
The new administration is worried that it will raise the budget deficit. The budget deficit is expected to grow by a factor of 2.6 by the year 2035, according to the Congressional Budget Office.
The Treasury will need to increase the amount of bonds it issues to fund bigger deficits. The Fed is also selling its own stock of bonds left over from post-financial crisis rescues, which adds to the need to find willing Treasury buyers. Increased tariffs from the United States may discourage potential overseas buyers from investing in America. Economics 101 tells us that the prices fall because there is more supply. Lower prices mean higher yields in bonds. Investors are saying, essentially, they want to be paid more to hold America’s debt.
“I have seen nothing in the data or forecasts that suggests the labor market will dramatically weaken over coming months,” Fed governor Chris Waller said this month.
The job market proved to be remarkably stable last month with employers adding more than a quarter-million jobs. If the labor market were to weaken, the Fed would face more pressure to cut borrowing costs.
The central bank has already cut its benchmark rate by a full percentage point since September. Calculating inflation is not a priority for policymakers, who are in no rush to make more cuts. A year ago, the consumer prices in December were up 3.0%.
The decision to not raise rates was widely expected, but it could cause a confrontation with President Trump, who told reporters earlier in the month that interest rates are too high.
The central bank left its benchmark interest rate between 4.25% and 4.5%. That helps determine the cost of other short-term borrowing, such as car loans and credit card debt.
Remaining the Classical Bottom-Line: Expected Rate Cuts from the First Five Years on the Rise of the Tevatron
According to a speech that was given this month to an international economic group, “Of course, we need to see what policies are enacted before we can seriously consider their effects.” “But my bottom-line message is that I believe more cuts will be appropriate.”
There was considerable disagreement within the rate-setting committee, however, with one member projecting no rate cuts in 2025 and others predicting as many as four or five quarter-point reductions.