Why Trump’s 1% Rate Demand Could Raise U.S. Borrowing Costs

A three-percentage-point rate cut sounds like a gift to borrowers. But if the Federal Reserve took its benchmark from 3.75%-4% down to 1% while inflation remained elevated, investors could see a warning that price stability had taken a back seat to political pressure. They might then demand higher returns to hold U.S. government debt, lifting borrowing costs across the economy instead of lowering them.

That is the market risk behind President Donald Trump’s repeated call for a 1% rate. J. Benson Durham, founder of DASM investment research, told Reuters such a cut “seems cataclysmic”: higher inflation expectations could push Treasury yields up, draw capital toward competing borrowers such as Germany and weaken the dollar. In that scenario, the government could pay more to borrow in bond markets even as the Fed’s short-term policy rate fell.

The distinction matters for households, too. The Fed sets a short-term benchmark, but mortgage rates are shaped more directly by longer-term bond yields. So a lower policy rate would not guarantee cheaper home loans if investors were bracing for faster inflation. The average 30-year mortgage rate was nearing 7% as affordability loomed over November’s midterm elections, according to Reuters.

The backdrop is hardly one of cooling prices. The Fed’s preferred inflation measure stood at 3.7% in July, Reuters reported, well above the central bank’s 2% target; the Fed does not expect inflation to reach that goal before 2029. Tariffs and higher energy costs tied to the U.S. war with Iran have added pressure. On September 16, the Fed under Chair Kevin Warsh raised rates for the first time in three years, voting unanimously.

Trump has publicly spared Warsh more than he did former chair Jerome Powell, even as he criticizes other Fed policymakers. That may reflect a more cordial relationship, but Warsh’s rate decision signaled that he is prepared to prioritize inflation control. Some administration allies reportedly backed the move privately.

There is also a political incentive to keep the focus on borrowing costs. A Reuters/Ipsos poll published Monday found just 17% approved of Trump’s handling of the cost of living, a central concern for voters. But blaming the Fed cannot make cheaper credit appear by decree. If investors lose confidence in the inflation outlook, the bond market can make the price of borrowing higher.