US Fed Raises Rates Despite Trump Pressure
The Federal Reserve hiked rates after the 10-year Treasury yield breached 5%, defying President Trump's demands for cuts.
Key points
- The US Federal Reserve raised interest rates after the 10-year Treasury yield hit a 19-year high above 5 percent.
- A Federal Reserve Bank of New York report states that 94 percent of tariff costs were borne by US companies and consumers.
- Trump proposed a $5,000 dividend per adult funded by $1.2 trillion in tariff revenue, a figure analysts deem unrealistic.
The US Federal Reserve raised its benchmark interest rate this week. The move followed a sharp surge in the 10-year Treasury yield. That yield climbed past 5 percent to reach a 19-year high. President Donald Trump publicly demanded a rate freeze before the decision. He argued that a strong economy warrants the lowest global rates. His logic conflated monetary policy with individual bank lending.
The hike was necessary to maintain central bank credibility. Freezing rates would have signaled a loss of autonomy. Markets would likely have pushed yields higher in response. The Federal Reserve acted to catch up with market pricing. This action aims to preserve trust in inflation control. It also demonstrates independence from political interference.
Political pressure distorts economic norms
Trump, Vice President JD Vance, and House Speaker Mike Johnson all urged rate cuts. They ignored standard economic theory linking growth to higher rates. Paul Krugman noted that a hot economy requires rate hikes. Trump’s rhetoric ignores the time lag in monetary policy. He treats complex macroeconomic tools as simple loan approvals. This approach undermines the rationality of central banking.
The administration claims tariffs do not hurt American consumers. A Federal Reserve Bank of New York report contradicts this. It found that 94 percent of tariff costs were borne by US firms. These costs were passed on to American consumers. The data covers the first eight months of the second term. This evidence challenges the administration's public narrative.
Fiscal promises risk inflation control
Trump pledged a $5,000 dividend per adult if Republicans win midterms. This plan relies on $1.2 trillion in tariff revenue. Securing that amount is currently unrealistic. Combining monetary easing with massive fiscal stimulus creates risk. Such a mix could cause inflation to spiral out of control. The market rejected this pressure by demanding higher rates.
