A rare visit in history! Trump "pays a visit" to pressure the Federal Reserve, but experts harshly rebut: "Firing" Powell won't reduce the debt either

U.S. President Trump exerts symbolic pressure on the Federal Reserve: In addition to frequently stating his consideration of firing Chairman Powell, Trump will visit the Federal Reserve, marking the first time in nearly twenty years. According to the Zhitong Finance APP, his high-profile pressure on the Federal Reserve to cut interest rates is primarily aimed at reducing the government's increasingly rising debt interest expenses. However, economists generally warn that political interference in the independence of the central bank may have minimal effects, or even backfire.

Everything stems from interest rate cuts, Trump exerts pressure on the Federal Reserve

According to reports, the White House's schedule shows that Trump will visit the Federal Reserve on the afternoon of the 24th local time. This is the first formal visit by a U.S. president to the Federal Reserve in nearly twenty years. U.S. presidents have traditionally respected the independence of the Federal Reserve; both legally and practically, the Federal Reserve is not influenced by the political will of government officials. Trump's visit will be a significant symbolic gesture of the U.S. government's influence on the independence of the Federal Reserve.

This is also interpreted as Trump intensifying pressure on Federal Reserve Chairman Powell. Trump has consistently criticized Powell for not lowering interest rates—making comments almost weekly to attack him.

On Wednesday, Trump again accused Powell, stating that Powell's maintenance of borrowing costs at excessively high levels has impacted the real estate market. The Federal Reserve's responsibilities (as defined by Congress) are to focus on maintaining price stability and achieving full employment.

U.S. Treasury Secretary Mnuchin also expressed confusion over why the Federal Reserve has not cut interest rates. He stated that he does not understand why tariff issues would lead the Federal Reserve to delay interest rate cuts. He pointed out that even if tariffs do affect prices, it would only be a one-time price adjustment, not an inflationary event. He said on Wednesday, "I actually don't quite understand what the Federal Reserve is focusing on, because so far we have not seen any price pressures arising from tariffs."

Firing Powell?

Trump has even considered firing Powell, but experts say this action is not legally permissible. Although past presidents have expressed dissatisfaction with the Federal Reserve's policies, no one has taken such direct action.

Last week, Trump sought opinions from Republican lawmakers regarding the possibility of firing Powell. However, he later retracted this idea, stating, "We currently have no plans for that... I think it's almost impossible unless he is forced to resign due to fraudulent behavior."

Earlier this week, Trump told reporters at an event at the White House, "I think his performance has been terrible, but in any case, he will be leaving soon."

Mnuchin is responsible for the search for Powell's successor. He declined to disclose who is on the list. According to media reports, Philadelphia Fed President Waller, Chairman of the National Economic Council Kevin Hassett, former Federal Reserve Governor Kevin Walsh, and Mnuchin himself are all on this list. Regarding the selection process, he said, "This will be decided by the president. We are not in a hurry to do this."

Although Powell's term as Federal Reserve Chairman will end in May 2026, his term as a governor will not end until January 31, 2028, meaning he can serve on the Federal Reserve Board for nearly two more years. Powell has not informed Mnuchin whether he will resign from the position when his term as Federal Reserve Chairman ends Even a Major Reform for the Federal Reserve?

Bessent publicly called for a comprehensive review of the Federal Reserve, questioning its excessive focus on tariff issues in the absence of obvious inflationary pressures, which he believes threatens the independence of monetary policy. He argues that Federal Reserve Chairman Jerome Powell should promote institutional reforms to separate monetary policy from other affairs to address the current issue of "mission drift." This statement has sparked speculation about whether the U.S. government plans to formally review the operational mechanisms of the Federal Reserve.

Despite recent rumors that Trump is attempting to fire Powell, the impact of systematically reforming the Federal Reserve would far exceed personnel changes. Although the Federal Reserve Chairman is important, decisions still need to be collectively discussed by the Federal Open Market Committee, a design intended to prevent excessive political interference. Reforming the institutional structure of the Federal Reserve requires Congressional approval, a process that could be quite lengthy. Many Republican lawmakers are cautious about intervening in the central bank, and recent Supreme Court rulings also suggest that the Federal Reserve's unique historical status should be maintained. The current controversy highlights the Federal Reserve's dilemma between maintaining policy independence and responding to political pressure, with systematic reform facing dual legal and political obstacles.

Trump's Motivation: Lowering Interest Rates Can Reduce Government Debt Costs

More importantly, Trump emphasizes the focus on interest costs, as the U.S. is currently under scrutiny due to rising federal debt and its corresponding high interest expenditures. Interest expenditures for this fiscal year are expected to exceed $1 trillion for the first time.

Moreover, Trump has just signed a "massive and far-reaching bill," which is expected to increase the deficit by over $3 trillion in the next decade and further drive up interest rates. Additionally, Moody's recently downgraded the U.S. debt rating, partly due to the increase in government debt and the rising interest payment ratio.

Trump reiterated that the Federal Reserve should lower the current policy interest rate (currently at 4.25% - 4.50%) by 3 percentage points, claiming that this move would save the U.S. $1 trillion annually. This indicates that one of Trump's key reasons for wanting to lower interest rates is that it could reduce the federal government's interest expenditures due to debt—this expenditure was the government's second-largest spending item in June.

In fiscal year 2020, the U.S. paid $346 billion in interest costs. According to the Congressional Budget Office, this figure has risen to an estimated $952 billion in the current fiscal year and is expected to exceed $1 trillion in the coming year. Interest expenditures in fiscal year 2024 have surpassed Medicare and defense spending, and are only second to Social Security expenditures. Currently, about 18 cents of every dollar in tax revenue goes to repay debt interest. By the end of the next decade, this proportion is expected to rise to about 25 cents.

"Firing" Powell May Not Lower Debt Costs

Trump pressures the Federal Reserve and threatens to fire Chairman Powell to lower borrowing costs, but the effect may be minimal and could even backfire. While short-term interest rates may decrease, market concerns about political interference in the independence of the central bank and the risk of inflation reigniting will push up long-term rates.

The federal funds rate only affects some short-term debt, while long-term Treasury rates are constrained by inflation expectations and market supply and demand factors, and may even rise in response to significant rate cuts. The main reason for the surge in interest expenses in the U.S. in recent years is the expansion of debt and the shift in the interest rate cycle. Experts from the Federal Budget Committee emphasize that the Federal Reserve's ability to control long-term rates is limited, and simply lowering rates cannot fundamentally resolve interest pressure.

Marc Goldwein, senior policy director of the Federal Budget Responsibility Committee, also pointed out that to effectively reduce interest expenses, experts recommend achieving this by reducing the fiscal deficit, which requires politically costly reforms such as tax increases or spending cuts, rather than rate cuts. Currently, Trump's economic policy is contradictory—his plan cuts Social Security spending, but large-scale tax cuts have exacerbated the fiscal deficit. As budget experts say, the key to addressing interest burdens lies in implementing policies that genuinely reduce the deficit, rather than through monetary policy intervention or continuing to expand the deficit. This reflects the economic governance dilemma faced by the U.S. government: the profound contradiction between short-term political demands and long-term fiscal sustainability.

Economists at Deutsche Bank share the same view. Matthew Luzzetti, chief U.S. economist at Deutsche Bank, stated, "Replacing Powell will not have a significant impact on the interest costs of Treasury debt," because any benefits from lower short-term rates will be offset by rising long-term rates.

The analysis is based on market reactions during a period in July when reports indicated that Trump was considering firing Powell. Although short-term U.S. Treasury yields fell, long-term Treasury yields rose due to concerns that a more accommodative Federal Reserve policy could lead to higher long-term inflation.

Luzzetti's analysis indicates that if Powell were to be removed, the yield on the 2-year Treasury would decrease by 32 basis points, while long-term Treasury yields would rise significantly—with the 10-year and 30-year yields increasing by 31 basis points and 70 basis points, respectively. He noted that this steepening of the yield curve would have a counteracting effect on debt repayment costs. His calculations suggest that if Powell were removed, the U.S. Treasury could save only about $12 billion to $15 billion by 2027, contradicting Trump's claim of saving trillions of dollars.

Gennadiy Goldberg of TD Securities also pointed out that firing the Federal Reserve Chairman could lead to an increase in long-term interest costs of about $58 billion per year. Goldberg added that long-term Treasury yields could rise by 20-50 basis points (with each basis point equal to 0.01%), bringing the 20-year and 30-year rates close to around 5.5%.

He calculated that this increase would correspond to an annual interest increase of $58 billion on approximately $276 billion in 30-year bonds and $168 billion in 20-year bonds issued by the Treasury each year. This estimate only covers 20-year and 30-year bonds and does not include other maturities such as 10-year bonds, which may also see rising rates.

Deutsche Bank's analysis also examined whether more significant rate cuts (close to the approximately 1% target level mentioned by Trump) could effectively change the outcome. While under favorable assumptions, larger rate cuts could potentially save about $78 billion in debt repayment costs by 2027, Luzzetti cautioned that this would largely depend on market reactions, and market rates may not necessarily decline as expected.

Conclusion

It is ultimately important to emphasize that because the market is likely to factor in a "higher risk premium surrounding the independence of the Federal Reserve and inflation issues," it could offset any theoretical savings in financing costs, confirming that the notion of "replacing Powell can lower government costs" is not valid.

Experts also warn that if he is dismissed, or even if just a signal of political pressure is sent, it could lead investors to demand higher rates. Rate cuts made under political pressure would further increase inflation risks—while abnormal changes in the Federal Reserve's leadership would exacerbate this risk. Such actions would indicate that the Federal Reserve not only lacks the determination to curb inflation but also loses the ability to control it.

The greater the pressure publicly exerted by the White House, the harder it becomes for the Federal Reserve to agree to the rate cut plan requested by Trump. Because potential bond buyers least want to see a central bank that yields to political pressure. Even if there is a necessity for rate cuts, the Federal Reserve must now double down on efforts to prove that such cuts are not a result of pressure from the White House