Trump’s Promise to Lower Interest Rates Faces Economic Challenges
WASHINGTON (AP) — President Donald Trump has vowed to lower interest rates and reduce prices, but the post-pandemic economy presents significant challenges that could make these promises difficult to fulfill.
While the economy shows solid growth, driven by strong consumer spending, it also faces large and potentially growing budget deficits. At the same time, businesses are borrowing more to invest in data centers and artificial intelligence, which is increasing demand for loans and, consequently, pushing interest rates higher.
Additionally, if Trump moves forward with widespread tariffs on imports and immigration restrictions, economists warn that inflation could rise, making it less likely that the Federal Reserve will reduce its key interest rate this year.
Despite these obstacles, Trump reiterated his stance during the World Economic Forum in Davos, Switzerland, stating that lower oil prices would lead to reduced inflation, which in turn would “automatically bring interest rates down.” When asked if he expected the Federal Reserve to heed his request, Trump confidently responded, “Yeah.”
However, experts believe that the current resilience of the U.S. economy — which has bounced back from the pandemic and previous inflationary scares — could keep borrowing costs elevated.
Jan Hatzius, chief economist at Goldman Sachs, described the economy as being in a "sweet spot of healthy growth," with the economy expanding at a rate of 3% for four out of the last five quarters, the longest such streak in a decade. Unemployment stands at a low 4.1%, and inflation, which peaked in 2022, has dropped to 2.4%, based on the Federal Reserve’s preferred inflation gauge.
Rising wages, which have outpaced inflation for the past 18 months, are also fueling continued growth. With more people borrowing to buy cars, homes, and large appliances, and businesses investing in technology and infrastructure, demand for loans remains high, which could keep interest rates elevated.
This situation marks a stark contrast to the economic landscape when Trump first took office in 2017. At that time, the U.S. economy was recovering from the Great Recession, with low inflation and sluggish growth. Since then, many households have reduced their debt, and upper-income families have benefited from strong gains in home values and stock market wealth, which is boosting consumer spending.
Furthermore, technology companies are ramping up investments in data centers to support artificial intelligence development, further driving demand for loans. Trump recently announced a joint venture between OpenAI, Oracle, and Japan's Softbank to invest $500 billion in data centers and electricity generation to support AI research.
As Joe Brusuelas, chief economist at RSM, pointed out, the era of low inflation and low interest rates has passed. We are now in a new environment characterized by scarce capital and higher rates.
Trump’s promises to stimulate the economy through tax cuts and deregulation could also contribute to inflation, according to economists. "That’s going to be inflationary, and that’s going to push Federal Reserve policymakers to adopt more stringent policies," said Gregory Daco, chief economist at EY, which would lead to a higher interest-rate environment.
Even if the Fed does lower its key interest rate, borrowing costs may not drop as expected. Since the Fed started cutting rates in September, the yield on the 10-year Treasury note, which influences mortgage rates, has actually risen.
Investors, anticipating stronger economic growth, are skeptical about the potential impact of Trump’s proposed tariffs, viewing them as bargaining chips in international trade negotiations rather than permanent measures.
Brusuelas added that the rise of protectionist policies is contributing to higher prices globally. “Instead of globalization driving prices lower, we’re now relocating supply chains and protectionist barriers are going up,” he explained. This trend is expected to push prices higher, albeit modestly.
Lastly, the growing federal budget deficit, projected to reach $1.9 trillion this year, further exacerbates the situation. As Treasury securities become necessary to finance the debt, Wall Street investors may demand higher yields, which could lead to higher long-term interest rates.
Fed Governor Chris Waller recently warned, “If we don’t get fiscal deficits down, we’re going to see higher longer-term bond yields.” With Trump’s tax proposals expected to increase the deficit, the pressure on interest rates could persist.