Trump’s 1% rate demand would be ‘cataclysmic’, analysts warn

President Donald Trump’s repeated calls for the US Federal Reserve to cut interest rates to 1% are impractical and would likely trigger global financial dislocation, analysts say. A 3-percentage-point reduction from the current 3.75%-4% range would push Treasury yields higher, weaken the dollar and

WASHINGTON — As a lifelong real estate investor whose businesses relied on debt and interest rates, President Donald J. Trump might be expected to know better: The 1% rate he keeps demanding from the US Federal Reserve is impractical and would likely backfire, according to analysts.

A policy rate slashed that low, from its current range of 3.75% to 4%, would likely touch off massive dislocation in the global financial system and end up with the US government paying more to borrow than it does now in bond markets. Some figures close to the president say his interest rate demands should be seen less as a prescription and more as a way to deflect from issues like high consumer prices ahead of midterm elections in November.

But in practical terms, a 3-percentage-point cut by the Fed “seems cataclysmic,” said J. Benson Durham, founder of DASM investment research firm. Treasury rates would climb as investors priced higher inflation, countries like Germany could soak up capital by offering just a bit more to lenders than the US, and the dollar would “plummet,” he said.

Yet despite the bond market math and concerns about Fed credibility, Mr. Trump has repeatedly called for ultra-low borrowing costs, which he says the US deserves as the world’s largest economy with, he argues, the safest credit. After the Fed under its relatively new chair, Kevin Warsh, hiked rates last week, Mr. Trump criticised the decision and repeated the 1% figure.

“The president in his own way is saying, ‘I don’t like the pain of this,’ but he should be clear that it’s not the fault of the Fed” for having to raise rates, said Grover Norquist, head of the conservative group Americans for Tax Reform, and an outside Trump economic adviser. Given the importance of controlling inflation ahead of the vote, some allies of the administration privately praised Mr. Warsh after the rate decision, according to one person involved in the exchanges, who requested anonymity to discuss them.

A White House ally who liaises with Mr. Warsh told Reuters the calls for 1% are unrealistic given the workings of global bond markets. “Can everybody just wake up? If you mess up the bond market, it’s good for the bond investor and no one else,” said the person. The White House did not respond to requests for comment. The Fed did not comment on Mr. Trump’s remarks.

Mr. Trump’s pressure on the Fed goes beyond the 1% rate request. He aims to oust Governor Lisa Cook, an appointee of former President Joseph R. Biden, and is awaiting results of an inspector general’s probe of former Chair Jerome H. Powell’s oversight of a Fed construction project. Some analysts say the Fed remains a useful scapegoat for Mr. Trump, who heads into the midterms with mortgage rates nearing 7% and prices for staples like ground beef and gasoline also rising, underlining the issue of affordability.