Trump Calls Fed Officials ‘Boneheads,’ Calls for Zero or Negative Rates

President Donald Trump gestures to the crowd as he arrives at a campaign rally at Williams Arena in Greenville, N.C., Wednesday, July 17, 2019. (AP Photo/Carolyn Kaster)
AP Photo/Carolyn Kaster

President Donald Trump pushed his calls for lower interest rates further Wednesday, indicating that the Federal Reserve should perhaps aim for negative interest rates.

The president said the Fed should get U.S. government interest rates “down to ZERO, or less,” arguing that the U.S. should “always be paying the lowest rate.”

The Fed targets the overnight interest rate banks pay to borrow reserves from each other. But expectations for the Fed’s target control longer-term yields on bonds issued by the U.S. government. Lower rates make it cheaper for the government to borrow, lowering deficits by lowering required interest rate payments.

Around $17 trillion in global bonds now have negative yields, meaning investors who hold them to maturity will lose money on the bonds. But if yields fall even further, the price of those bonds could go up, rewarding investors for having bought them despite the negative rate.

U.S. bonds remain solidly in positive territory and the yield curve is no longer inverted, meaning long-term bonds once again have higher yields than short-term bonds. Jim Bianco, who heads Bianco Research, recently tweeted that U.S. bond yields are the highest in the developed world for the first time since 1958.

As President Trump correctly points out, interest rates on Treasuries are a major factor in future borrowing costs. Those, in turn, have a big influence on the size of future budget deficits. Lower interest rates can mean major savings for the U.S. government by lowering the amount the government must spend to support its debt. The Congressional Budget Office recently revised down its estimate of future interest rates by a small amount but said this would save $1.4 trillion in interest payments over the next ten years.

Trump called Fed officials “boneheads” for keeping rates too high.

Fed officials meet next week to assess the economy and set their interest rate target. They are widely expected to reduce the target by one-quarter of a percentage point, often called a 25 basis point cut. Some investors think they could cut by as much as a half a percent point.

Top Fed officials typically “go dark” in the week before the monetary policy meetings, avoiding making public speeches or comments. President Trump has in recent months taken to criticizing the Fed during this so-called ‘blackout’ period.

 

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