US borrowing costs at risk as Trump escalates fed criticism

Economists have warned that Donald Trump’s push to force the Federal Reserve to reduce interest rates in a bid to reduce the US government’s financing costs and juice the economy could end up badly misfiring.,

Trump has launched repeated attacks on Fed chief Jay Powell, whom he has called a “moron” and a “stubborn mule”, with a lot of criticism. The president has relentlessly called on the central bank to lower interest rates by as much as three percentage points from their current range of 4.25-4.5 per cent. 

Trump moves to reshape Fed board with loyalists after targeting Cook

These attacks set a new tone on Monday, when Trump moved to fire Governor Lisa Cook, whom his administration has accused of lying on her mortgage applications. Cook, who has not been charged with any crime, has vowed to challenge the dismissal in court.

Already, Trump is moving to stack the Fed’s board with loyalists. He has nominated his ally, Stephen Miran, to succeed Adriana Kugler, while previous appointees, Michelle Bowman and Chris Waller, have supported his push for lower rates. Powell has indicated that he will serve as chair until his term ends next May but will remain a governor through 2028.

Economists warn Fed’s independence at risk as markets react

Economists say that if Trump’s allies gain a majority on the seven-member board, the Fed’s independence and credibility could be undermined—ironically pushing long-term rates higher. “We are heading back to a world in which the Fed is far more politicised,” said Stephen Brown of Capital Economics. “That risks greater uncertainty about interest rates and higher borrowing costs.”

Markets are already showing signs of stress. On Tuesday, the gap between two- and 30-year Treasury yields hit its widest in three years, while the US dollar slipped 0.2% against major peers. JPMorgan’s Priya Misra warned that weakening Fed independence “explains the immediate reaction of a weaker dollar and a steeper curve as inflation risk should rise.”

Blake Gwinn of RBC Capital Markets said the situation could mark “a complete paradigm shift where the president essentially sets monetary policy,” adding that markets must weigh the long-term implications for inflation expectations, volatility, and demand for US debt.

Although the Fed controls overnight lending rates, the Treasury’s average debt maturity is six years, meaning longer-term rates are more decisive for government financing costs. Claudia Sahm, a former Fed official, noted the central bank could revive crisis-era bond purchases to cap yields if borrowing costs surge.

Still, many economists say it is too early to gauge the fallout, with Trump’s attempt to remove Cook almost certain to face a drawn-out legal fight, possibly reaching the Supreme Court.

The White House defended Trump’s decision, saying he acted lawfully to remove a governor “for cause,” which spokesperson Kush Desai argued would “improve the Fed’s accountability and credibility.” Both the administration and the Fed pledged to respect the courts’ ruling.

Some analysts point out that the US dollar’s role as the world’s reserve currency provides a buffer. “When you look at the available bond market, there is nowhere else to go,” said Brown University’s Mark Blyth.

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