The U.S. high inflation whistleblower: Trump attempts to control the Federal Reserve and push for interest rate cuts, which may cause inflation expectations to soar

On Thursday local time, former U.S. Treasury Secretary Larry Summers warned that President Trump’s attempts to control the Federal Reserve and push for interest rate cuts could trigger a surge in inflation expectations, thereby raising long-term borrowing costs:

I don’t know of any mainstream economist who supports a 1% interest rate in the current environment. Such a move might bring economic prosperity in the short term, but at the cost of creating severe inflationary psychology.

Trump has called on Federal Reserve Chairman Jerome Powell and his colleagues to lower the current benchmark interest rate of 4.25% to 4.5% by as much as 3 percentage points. Most Federal Reserve policymakers have indicated that they need to pause rate cuts to better assess whether Trump’s tariff increases will lead to inflation.

On Wednesday, multiple media outlets reported that Trump is preparing to fire Powell. In response, Summers pointed out, On Wednesday, we saw a small-scale experiment that reflects the potential impact of the monetary policy advocated by Trump. Summers noted that the two-year U.S. Treasury yield fell, reflecting market expectations that the Federal Reserve might shift to an easing policy after a change in chairmanship. However, the 10-year U.S. Treasury yield rose, and U.S. stocks also declined.

Ultimately, Summers speculated that Trump would not remove Powell because “the market reaction would be very swift and quite severe.” He noted that U.S. Treasury Secretary Janet Yellen has a background in financial markets and should be well aware of the risks involved.

More broadly, Summers stated that the current policy mix of the U.S. government is sowing the seeds of a dangerous cycle: massive deficits lead to rising long-term borrowing costs, which in turn exacerbate budget deficits, further pushing interest rates up.

Summers pointed out that there are already signs of concern in the bond market, with expectations for long-term U.S. Treasury yields rising, which is an ominous signal for the U.S. mid-term creditworthiness.

He mentioned that the one-year forward 10-year U.S. Treasury inflation-protected securities yield has recently surpassed 3%, while the average level of this indicator since the beginning of the century has been around 2%. Another one-year forward 30-year U.S. Treasury yield has reached about 5%, compared to an average of about 4.3% in the 2000s.

Regarding inflation assessments, Summers stated that forecasting institutions, including the Congressional Budget Office (CBO), have not incorporated such high interest rate expectations into their borrowing forecasts. He said these market indicators pose an ominous warning about the U.S. government’s ability to issue long-term debt and are also a bad signal for fiscal deficits.

The CBO and other fiscal institutions predict that even if interest rates are below current market pricing, the “beautiful big bill” tax cut policy passed by Trump earlier this month will leave the U.S. facing excessive fiscal deficits over the next decade.

Summers said, “If you look at what’s happening in the bond market and then look at the performance of the dollar, you have to feel quite uneasy and concerned about the fiscal situation in the U.S.” Data shows that the dollar index recorded its largest decline since 1973 in the first half of this year.

Data released this week showed that some inflation indicators in June rose less than expected. In response, Summers said, “I thought we would see more inflationary pressure.” But he also noted, “It’s still too early, and I wouldn’t rush to conclude that tariffs are harmless to inflation.” "The more likely scenario is that its impact will be delayed."

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