Trump and the Fed.

The New York Times recently reported that Scott Bessent has apparently pulled himself from the running to be the next Chair of the Federal Reserve. It’s just the latest in a saga that pits President Trump against Jerome Powell, his hand-picked successor to Janet Yellen from his first term.

Perhaps it’s because Bessent can’t keep from putting his foot in his own mouth, as he did earlier in the week when he admitted the Trump Savings Accounts were really just a “backdoor to privatizing Social Security.”

Some things are a bridge too far, even for this administration. We’ll come back to Bessent in a bit.Whether Trump allows Powell to serve out his term—his term as Chair ends in May of next year, but he can remain on the board of governors until 2028—remains to be seen. Given Trump’s ability to flout norms and dismantle agencies with a Thanos snap, it’s anyone’s guess. Either way, it’s worth playing out Trump’s fantasy of slashing rates.

Trump has been overtly and increasingly critical of Powell, whom he’s dubbed “Too-Late-Powell” for his refusal to bring down interest rates. He’s determined to replace him with someone who will take orders, because he believes that the key to unlocking the next economic boom in America is more cheap money. Forget that it would signal the end of Fed independence, it would be catastrophic for the American consumer and for the global economy.

The idea behind slashing rates is that it would open up the credit markets and banks would suddenly start lending again. This is not without precedent, mind you. This was the Fed policy response in the wake of the Global Financial Crisis. The problem is it’s not 2010. It’s 2025. Cutting rates to almost nothing would benefit a small segment of the population and punish the vast majority of us.

Donald is fond of quoting how much money the country would save on servicing its debt if the Fed cut interest rates. That’s not how it works. He’s also fond of saying that it would unleash capital into the markets. That’s also not how it works necessarily. He likes to say that mortgage rates would come down. Also not how it works.

So what’s really behind his obsession with cutting the Federal Funds rate?

He has said that every point reduction would amount to billions of dollars saved in servicing our debt. And that if he had it his way, the Federal Funds rate would be 1%. So let’s work this out.

Bringing the Federal Funds Rate to 1% would reduce the yield on short-term assets and commercial loans. The idea is to encourage spending through increased borrowing, rather than encouraging savings. Yet doing so would further erode confidence in the dollar, thus weakening it and increasing inflation. At a time when inflation has already crept into the economy, this wouldn’t be a welcome development for consumers.

Contrary to what Trump seems to believe, It does not impact long-term yields such as the ten-year and thirty-year treasury yields, because those are set by the market. Long-term yields are what mortgages are tied to. This is an important distinction because Trump repeats the claim that reducing rates would be good for the average American, but that’s not what the Federal Funds rate does in practice.

The rate set by the Federal Reserve is what it charges to other banks. When banks have the ability to borrow at low rates—assuming there’s enough capital to do so—they can theoretically lend it out at more competitive rates to customers. This is very helpful in refinancing things like commercial debt and commercial mortgages, but not residential mortgages.

Where it does impact the consumer is in terms of credit card interest rates. These are actually tied to the Federal Funds rate. Policy makers hope that it influences other rates, but most of the rates tied to it affect the commercial sector. But even in terms of credit cards, the average spread between the federal interest rate and your credit card interest rate is 14.5%. So you’re talking about your credit card rates coming down from 19% to 15%. Gee, thanks.

Also, if longer term treasury yields don’t come down because the market thinks the economy is in bad shape, banks are more inclined to reinvest their capital into high yield treasuries and their own reserves, rather than putting more money on the street. Just because banks can get cheaper money doesn’t mean they’re going to lend all of it, especially in a recession. If a bank can borrow money at 1.5% but invest it in Treasury bonds at 4%, it’s a much better investment than risking it on giving your small business a loan.

In this case, it is a way to increase the purchase of U.S. Treasuries. Considering the capital flight among foreign investors, perhaps this is part of the administration’s calculus. The reason it could theoretically prop up the treasury market is because banks can essentially take advantage of arbitrage in the lending spreads. If banks can borrow from the Federal Reserve at 1% and reinvest them in Treasury notes at a higher rate, it becomes a guaranteed profit center.

Let’s be charitable for a moment and assume that Donald Trump really doesn’t fully grasp the role of interest rates and the relationship between rates and real people. Because he views everything through a privileged real estate developer lens, maybe he just needs some clarity. So here goes.

It’s important to remember that interest rates are expenses to you and me, but investment returns to institutional buyers like countries and corporations.

Another side effect of lowering interest rates is the increase of capital flows into the equity markets. If short-term yields suddenly plummet along the fixed asset class, it makes alternative investments like the stock market and speculative assets like gold and Bitcoin more attractive. Again, this might also explain Trump’s rationale. Wait a minute, maybe he does understand interest rates. He gauges success by the stock market and has a significant personal stake in cryptocurrency. So maybe he thinks we’re all just like him.

So let’s put it all together.

• Lowering the Fed rate would benefit corporations with high interest rate debt and real estate investors looking to refinance properties.

Hmmm. Trump owns a lot of real estate.

• It would cause an enormous capital shift from bonds to equities and boost the stock market.

We know how much Trump loves the stock market. I bet he’s got a lot of stocks too.

• It would increase purchases of longer-term treasuries because those yields would increase on the weakness of the dollar, thereby boosting dollars in circulation.

Isn’t the Trump family building a private, shadow stablecoin monetary system that would be backed by the U.S. Dollar?

• In fact, they are.

Boy, when you put it all together it helps explain Trump’s view on rates and how it would benefit his presidency in the short-term and his crypto holdings in the long-term. But it doesn’t explain why the GOP is going along with this plan in lockstep. The inflation impact alone would be devastating to the average American and, as we’ve said many times before, the brunt of the economic fallout is going to be on red states that supported his agenda.

Here’s where Scott Bessent’s admission is so vital to this discussion.

Pair Trump’s inflation-inducing tariff war with potentially catastrophic inflation as a result of a hefty rate cut with his domestic agenda to eliminate the administrative state. The economic fallout would force millions of Americans into further economic despair only to be let down by the very safety nets that were constructed for these very moments. It’s all by design.

When necessary government assistance like retraining, Medicaid, unemployment insurance and disability fail, it leads to even further discontent with the public system.

Not only are they ready for that, they’re banking on it.

When Scott Bessent revealed the whole hand by admitting that the Trump Savings Accounts are a backdoor to privatizing Social Security, he gave us the endgame. But Social Security is the most popular program in the nation by a wide margin. The only way to convince Americans to perform surgery on themselves when they cut their own throats is to dismantle the hospital and fire the doctors.

Tearing down the administrative state by firing Social Security administrators and closing field offices is designed to frustrate Americans.

Building up the equity markets by making them the only haven for capital not only lines the pockets of corporate shareholders, it gives the impression that the market is more stable than a guaranteed check from the government.

This is the ultimate unwinding of LBJ’s Great Society and the social welfare state developed under FDR. All the things we hold dear in this society.

It’s important we all level up our financial literacy to understand what they’re pulling off. Not only did they commit this all to writing in Project 2025, it has been the GOP plan since Lewis Powell fired off the Powell Memo as a call to arms to corporate America to halt influence of government and the public sector. This is a complete and total corporate coup d’état and we cannot keep falling for it. In a time of great distraction, keep your eyes on the prize because they’re robbing us blind. Putting you into a state of economic despair isn’t a byproduct of the plan, it’s central to it because they want you to lose hope and faith in the system.

And look. The system isn’t perfect. But it’s the one we have and it’s worth fighting for. So in the next election cycle, don’t just make it about the lesser of two evils and an “anyone but Trump and his GOP” vote. Listen closely for progressive candidates who speak this language and understand the nuance of wealth inequality and the importance of social safety nets.

Image Source

• The White House, Public domain, via Wikimedia Commons. Changes were made.