“The Congress shall have Power …To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…”.
It seems pretty clear to me that Article 1 Section 8 of the US Constitution (quoted above) gives Congress the power to coin money and regulate its value. Nowhere in the document, does the constitution give the President the right or power (either explicitly or implicitly) to define how the value of money is to be maintained. So why does President Trump think that this power has been granted to him?
The easy smart-aleck answer is that he doesn’t think at all. A possibly more accurate answer is that he wants the Fed to bring down interest rates. But that presents a problem. The Fed is actually powerless to bring down the general level of interest rates, absent a sustained reduction in inflation.
For some reason or other the popular press insists on reporting that the Fed began lowering interest rates in September of 2024. And sure, it’s fair to say that the Fed began to lower overnight rates in September of 2024. The Federal Open Market Committee (FOMC) cut the overnight rate ½ of a percent on September 18 and followed up with further rate cuts in November and December. By the end of time December they had lowered the overnight rate by a full percentage point.
But the general level of interest rates did not go down; in fact, except for short-term rates, bond yields rose. Right before the Fed slashed the overnight federal funds rate by 50 basis points, the 2-Year Treasury note was trading around 3.59%; the 10year Treasury was trading around 3.65%.
But now, almost a year after the Fed lowered the overnight rate by a full percentage point, Treasury 2-year and 10-year rates went up. For example, Treasury just auctioned off 2-year notes at a yield of 3.64. And 10-year notes are trading to yield 4.28%. Which is to say that rates went up, not down. And just to be clear, consumer rates are priced off Treasury rates. If Treasury rates go up, consumer rates will tend to follow.
The rise in long term rates is not a random event. Their is a reason for it, which is: Investor expectations are changing. Treasury securities, and the dollars they are denominated in, used to be thought of as the world’s safest investment instruments. Perhaps global investors are starting to have second thoughts.
There are at least two explanations for this. The first is the huge (and growing) quantity of debt that must be serviced by the US Treasury. Treasury debt now amounts to about $37 trillion. The costs associated with servicing that debt is now putting pressure on the US Treasury. And that doesn’t count all the implicit promises Treasury has made. Nor does it count the remittances the Treasury no longer gets from the Fed—because the Fed is bleeding cash on its $6.5 trillion portfolio that is now underwater.
As it stands now, we are on track to spend at least $1 trillion dollars in Gross Interest Costs for FY 2025. That projection is about the same as the military budget for FY 2025, which clocks in at $1.045 trillion.
There is a reason for the huge and growing debt service cost: the population votes for it, at least indirectly. People in the middle class have convinced themselves that (1) they have “paid into” the programs that drive federal spending, namely Social Security and Medicare and (2) tax rates can be raised on “the rich” to fund any shortfalls.
But the middle class has not paid in; not by a long shot. And raising taxes on “the rich” wouldn’t come close to filling the gap. In fact, without large middle class tax increases or benefit cuts Social Security and Medicare are due to run out of money in the early 2030s. They are effectively middle class welfare programs.
A second reason why longer term rates have risen is that lenders are becoming more and more skeptical of both the competence of the Fed (think transitory) and with President Trumps attacks on it. Consequently, investors demand a higher rate as compensation for the risk they take by buying long dated Treasuries.
When President Trump attacks the Fed and its governors, the players understand exactly what he is doing, which is to threaten the independence of the Fed. (See the opening paragraph above). We have seen this movie before and it never ends well. It is a sure fire recipe for an increase in inflation. Such an increase would serve to devalue US dollar holdings.
Let’s face the reality of where we are. Donald Trump’s hero is Andrew Jackson, who put the Second Bank of the United States out of business. With his attacks on the Fed, Donald Trump is simply going down a well trod path that sacrifices institutional stability for (hoped for) short term political gain.
In so doing, President Trump consistently displays an attitude toward the Fed that is reminiscent of Wright Patman, the Texas populist who served in Congress from 1929 until 1976. Like Patman, President Trump has no understanding of monetary theory or policy. He just wants rates to be lower and he thinks (wrongly) that the Fed has the power to bend the market to its will.
But the Fed is powerless to bend the market to anybody’s will. Which, if he gets his way, President Trump may be about to find out, the hard way. Unfortunately, a lot of people are liable to get hurt in the process.
JFB
