Trump might not like what he gets at the Fed

President Trump may be able to appoint a loyalist to chair the Federal Reserve Board of Governors, but that hardly guarantees he will get lower interest rates that boost the economy.

The Fed can set only short-term interest rates, notably the federal funds rate, which is what banks charge one another for overnight loans.

Mortgage, car loan and business borrowing rates are much more influenced by the 10-year Treasury rate, which doesn’t move in lockstep with the federal funds rate.

The market for U.S. securities is global. Foreign central banks hold Treasurys to back their currencies, and the dollar is the vehicle currency in almost 90% of all cross-border trade and investment transactions.

Similarly, with annual deficits in the range of $1.7 trillion to $1.8 trillion, the federal government depends on foreign investors to help finance new outstanding debt.

Annual additions to the national debt are 1.4% of global gross domestic product.

This new debt must compete with additions to foreign government debt. Deficits will grow in China to combat weak domestic demand and a property crisis, in Japan to stimulate growth, and in Europe to rearm to deter Russian aggression.

Similarly, the private sector’s appetite for capital, in particular to build out artificial intelligence, makes financing the federal deficit in domestic markets more challenging.

Bond investors typically seek a return that exceeds inflation.

Likely, we are returning to conditions in capital markets that more closely resemble the decades before the 2008 global financial crisis than the period of the COVID-19 crisis.

Over the past four decades, inflation averaged 4.0%, and the 10-year Treasury yield averaged 7.4%. Since September 2024, the Fed has cut the federal funds rate by 1.75%. Meanwhile, the 10-year Treasury rate has risen from about 3.7% to above 4%, reflecting more intense competition for funds and elevated inflation expectations.

The federal funds rate is set by the voting members of the Federal Reserve Open Market Committee, which comprises the seven governors, the president of the New York Federal Reserve Bank and, on a rotating basis, four of the 11 other Reserve Bank presidents.

All 12 participants in the meetings contribute to the closely watched Fed forecasts for GDP, inflation and the likely path of the federal funds rate over the next few years.

At the December meeting, six of the 19 Fed policymakers indicated that they would prefer not to cut interest rates.

Indeed, Mr. Powell faced a challenge in forging a consensus for a 0.25% rate reduction, as many voting members expressed reservations about the prudence of lowering interest rates.

The policy statement that followed the December meeting and Mr. Powell’s comments at the press conference indicate that the Open Market Committee will likely lower interest rates further but will pause to evaluate the extent and timing of future reductions.

After the most recent meeting, Kevin Hassett, chairman of the National Economic Council — the most senior White House economic adviser to the president — criticized Mr. Powell for not presenting a stronger set of supporting data to push for a larger rate cut.

As with all other appointments, Mr. Trump wants someone at the Fed who is loyal to him and his agenda.

However, if the Fed chairman isn’t viewed as guarding the central bank’s independence and making his recommendations to the Open Market Committee on the basis of a dispassionate assessment of the risks of lowering inflation to 2% and accomplishing full employment, he could easily have a revolt on his hands.

Sustaining stability in financial markets and international confidence in the dollar requires that the Fed not become subordinated to the White House, as presidents from both parties naturally prefer lower interest rates.

Lower rates make buying homes and cars easier for voters and reduce the share of federal outlays consumed by interest payments on the national debt.

In late November, when Mr. Hassett emerged as the front-runner for the chairman nomination, colleagues who had supported his nomination to chair the National Economic Council expressed misgivings and doubts about whether he had the temperament and fortitude to resist Mr. Trump’s pressure. Members of the Treasury Borrowing Advisory Committee reportedly voiced concerns about his potential appointment.

The dollar has played a central role in global commerce owing to the sheer size of the U.S. economy and investor confidence that the currency will be well-managed and the Fed won’t become captive to the federal government’s borrowing needs.

At the December meeting, the Fed announced it would purchase $40 billion a month in short-term Treasury notes to maintain adequate liquidity in financial markets.

The Fed is effectively printing money, and by monetizing the national debt, it relieves pressure on the Treasury to sell new debt.

Those purchases are expected to moderate, but market confidence, domestically and internationally, depends on the Federal Reserve being above politics and immune from White House pressure.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.