Trump & Bessent: Still on Same Team?
Seek Different Objectives
To no one’s surprise, the Federal Open Market Committee did not cut interest rates on Wednesday. But while the Fed held steady, pressure from the White House to ease policy intensified further.
Anticipating that the Fed would stand pat, President Trump escalated his criticism of the central bank, calling Chairman Jerome Powell a “stupid person.” The President’s call for a sharp two-percentage-point cut in the Federal Funds rate — from the current 4.25% - 4.50% range to around 2.25% — would have served two of his objectives. First, Trump may have hoped that the inflationary impact of the tariffs he has imposed since April 2 can be partly offset by reduced borrowing cost for consumers. If the lower policy rate helps push down mortgage rates, for example, so much the better.
Second, and perhaps more significantly, Trump has been assessing the fiscal cost of the tax cuts embedded in his Big Beautiful Bill. Various estimates have suggested that the proposals, if passed, would increase the already large deficit by $2.4 trillion - 3.0 trillion during 2025 - 2034. The increase in bond issues to fill the gap would make it all the more urgent, from his perspective, to lower the debt service burden by bringing down bond yields.
Yet his strategy may be undermined by the very policies he is pursuing. Trump’s Treasury Secretary, Scott Bessent, has emphasized that the administration’s focus is not on the Federal Funds rate, but on reducing the yield on 10-year Treasurys. That may prove difficult, if not impossible, if the short end of the curve is aggressively cut without complementary disinflationary signals.
A steep reduction in the Federal Funds rate, in the absence of stabilization in oil prices or a significant cancellation of tariffs, would be counterproductive since it would raise inflation expectations. Markets may interpret the policy easing as accommodative in the face of rising price pressures. The result: a steepening yield curve, with long-term yields — including the 10-year — moving higher, not lower.
What emerges is a policy contradiction. Trump wants a rapid, headline-grabbing monetary easing, while Bessent appears focused on a sustainable control of long-term borrowing cost. The two goals may be politically aligned, but are economically at odds. Without addressing the inflationary impulses built into the administration’s own fiscal and trade policy, the White House risks asking monetary policy to fight against the consequences of its own actions.
Chairman Powell, for his part, offered a notably composed response to the President’s stinging criticism — a more balanced press conference than any in recent memory. Rather than echo Trump’s claim that tariffs would be absorbed entirely by foreign exporters, Powell acknowledged that the tariffs would raise prices in the U.S. economy. What remains uncertain, he said, is how the higher cost would be distributed — across the exporter, the wholesaler, the retailer, and the final consumer. In a signal of prudence, Powell indicated that the Fed would wait for more data before drawing conclusions or adjusting policy.
Despite the drama in Washington, both Treasurys and equities reacted with a yawn to the FOMC decision and Powell’s press conference. The announcement that the policy rate would remain unchanged, along with a “dot plot” projecting two rate cuts by the end of 2025, matched overall investor expectations. For now, markets appear to believe that Powell — not Trump — is still driving the monetary policy narrative.
The only modest surprise came from Fed Governor Christopher Waller, who said yesterday that the recent string of benign inflation readings could justify a rate cut as soon as next month. Then again, perhaps it wasn’t a surprise at all. Waller is reportedly under consideration to succeed Powell as Fed Chair next year, and this unexpectedly dovish tone might strengthen his chances of getting the top job.
Dr. Komal Sri-Kumar
President, Sri-Kumar Global Strategies, Inc.
Santa Monica, California
www.srikumarglobal.com
@SriKGlobal
June 21, 2025
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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The general misunderstanding among public and professional alike about which interests Fed controls is mind boggling.
Looks like our President also doesn't understand that forcing the Fed to reduce FFR will likely result in higher 10 year yields. Hope that reduction in FFR will reduce mortgage rates is also equally foolish.
The creditors don't just rely on the Fed model for lending. They also use their own brains.....although in last few years creditors have approached investing like vegetables.....offering 10 year for 0.5%. Maybe that was lesson learnt.
High deficits have always coincided with high inflation. There is good economic theory backing this. Maybe economists will learn something new this cycle but likely inflation will be high.