For the umpteenth time of this presidency (not to mention his entire career as commander in chief), Donald Trump has beckoned the Federal Reserve to slash the federal funds rate, evidently out of fear that current monetary policy will obstruct his imminent imposition of widespread tariffs. Jerome Powell, the Fed chairman who has publicly lamented his failure to stop the inflation wrought by Bidenomics once already, has said that the central bank will maintain its independence. And frankly, Trump should be thankful, as the Fed is currently insulating his second term in office from an even worse rebound of the inflationary crisis created by his predecessor.
Consumer price index inflation rose by half a percentage point in January alone, three times the Fed’s annualized inflation target of 2%. While defenders of Bidenomics will blame much of the price instability on the 15% monthly increase in egg prices resulting from the bird flu epidemic — another crisis that Biden allowed to spiral out of control — core CPI inflation rose to an eight-month high. Core services CPI, which reflects the stickier fundamentals of inflation, is up 4.3% over the year, more than twice the Fed’s target.
And now, the leading indicator of wholesale inflation has signaled that the worst is yet to come. Overall producer price index inflation rose by 3.5% in 12 months ending in January, the highest level in nearly two years, while core PPI inflation rose by 3.6%.
The Fed’s decision to deliver a supersize rate cut at September’s FOMC meeting was questionable enough, as were its subsequent 25-basis point cuts at the final two meetings of last year. But by enacting a pause in January and, perhaps more importantly, promising investors that cuts will not resume until price hikes reserve course, Powell is actually protecting Trump from the worst potential consequences of Bidenomics. In no arena is this more relevant than financing our $36 trillion national debt.
Elon Musk and the Department of Government Efficiency have correctly taken a hammer to the federal government’s discretionary spending. Beyond the political victories of dismantling the worst excesses of unelected bureaucracy in the form of DEI and the foreign aid-to-Soros pipeline, DOGE has reduced baseline discretionary spending by the billions. While estimates vary, even the liberal-leaning Washington Post has tallied at least $6 billion in spending cuts relative to annual projections.
Uncle Sam, of course, spends north of $6 trillion every year, making DOGE’s effort tantamount to less than one-tenth of 1% of all federal spending. But Musk — who is only four weeks into the job, mind you — has correctly pointed out that interest payments on our existing national debt have become the second largest line item in the federal budget, outpacing defense spending and Medicare in the last fiscal year. And in the first four months of this fiscal year that began in October, net interest payments on the national debt are already up 13% after a 34% increase in the year prior.
And why? Bond markets do not trust the federal government’s ability to restore price stability and reign in spending, two restraints that go hand in hand. This is why we saw the 10-year Treasury yield relax when Treasury Secretary Scott Bessent took the stand to swear by the White House’s commitment to slashing the deficit and why we saw the 10-year explode past 4.6% in the aftermath of Wednesday’s abysmal CPI print.
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Furthermore, the Fed’s rate cuts have maintained a strictly inverse relationship with bond yields over the past six months. In the time that the Fed cut the federal funds rate by 100 basis points, the 10-year yield has risen by 100 basis points. All of this would indicate that the Fed’s ability to cut the interest rates that Donald Trump cares about is fundamentally hamstrung so long as inflation and federal spending remain well out of control.
Luckily for Trump, he has the will, the weapon, and the popular mandate to bring a sledgehammer to Washington’s excess. The navel-gazing of the Fed is frankly the least of his problems.