The Federal Reserve Rightly Rejects Trump's Calls for Lower Interest Rates

Maintaining the elevated federal funds rate makes borrowing more expensive, but the alternative is artificially cheap money, malinvestment, and inflation.

The Federal Open Market Committee (FOMC) of the Federal Reserve announced on Wednesday that the central bank of the United States will hold the federal funds rate between 4.25 percent and 4.50 percent. The Fed's commitment to tight monetary policy, which reduces inflation by making borrowing more expensive, is sure to draw the ire of President Donald Trump, who has been pressuring Fed Chair Jerome Powell to dramatically lower rates.

The federal funds rate, which the FOMC sets eight times a year, is "the interest rate at which depository institutions trade federal funds…with each other overnight," explains the St. Louis Federal Reserve. It influences "the rate banks charge their customers with higher credit ratings" and "longer-term interest rates such as mortgages, loans, and savings."

Trump has long tried to influence the Fed's decisions. In the early days of the COVID-19 pandemic, the president pressured Powell to implement "the lowest Rate" in the world. The Fed subsequently lowered the federal funds target range from 1.50 percent (upper limit) to 1.75 percent (lower limit), to 0 percent to 0.25 percent in March 2020 and held it there until March 2022.

Maintaining this low rate during "a period of massive fiscal expansion and widespread supply disruptions certainly amplified inflationary pressures," Peter C. Earle, director of economics and economic freedom at the American Institute for Economic Research, tells Reason. To bring down inflation, the Fed increased the upper limit continuously from March 2022 until July 2023, when it reached a high of 5.50 percent.

The Fed began reducing the federal funds rate in September 2024, reaching its 4.25 percent to 4.50 percent target range in December 2024—where it will remain until the FOMC convenes again in September. This range is designed "to restrain credit expansion, dampen speculative activity, and slow demand enough to bring core inflation closer to the 2% target," says Earle. Only two of the FOMC's 12 voting members dissented from the majority, recommending a cut of 25 basis points (0.25 percentage points), The Wall Street Journal reports.

The relationship between Trump and Powell soured in the lead-up to this announcement. The president wrote a letter to the Fed chair saying that Powell has "cost the country a fortune and…you should lower the rate—by a lot!" In his Truth Social post sharing the letter on June 30, Trump said, "We should be paying 1% Interest, or better!" Earle says this would be "reckless and destabilizing," especially for "housing and asset markets."

Regardless, Trump reiterated that he'd "love [Powell] to lower rates" during a visit to the Federal Reserve Bank of the District of Columbia last Thursday and has blamed the Fed chair for the unaffordability of houses, especially for first-time buyers. But "the [housing] problem is rooted in a decade of cheap money that fueled housing inflation in the first place [and] a 1% target would…postpone necessary economic corrections," says Earle.

The Fed's decision to hold rates steady may not only reflect inflation vigilance but strategic positioning as well: "By maintaining current policy rates, the Fed preserves room to maneuver should a tariff-induced shock—such as a profit squeeze, credit stress, or equity market correction—suddenly materialize," explains Earle.

Sid Gundapaneni, research analyst at the Hoover Institution at Stanford University, tells Reason that, while he thinks "the Fed isn't too fearful of inflation re-emerging were they to cut…not cutting now gives them more room to cut in the future."

If Trump's tariffs produce widespread price inflation, the president will be grateful for this monetary wiggle room.