Can the Fed Slash 300 Basis Points?

Since the beginning of Donald Trump’s presidency, there has been a continuous push from him for the Federal Reserve and its chair, Jerome Powell, to lower interest rates significantly. However, Trump lacks the authority to directly remove Powell, which limits his influence over the Fed’s monetary policies. This raises the question: what if the Federal Reserve opts for a drastic 300 basis point rate cut?

What Would a 300bp Rate Cut Mean?

Trump’s push for a massive 300bp rate reduction is considered bold by many. Typically, the most significant rate cut occurred in March 2020, a mere 100bp. By slashing rates to such an extent, Trump’s goal is reportedly to reduce national debt expenses. With current debt servicing costs reaching $1.2 trillion annually, a reduction could alter the fiscal landscape considerably.

To put these figures in context, the U.S. pays $3.3 billion every single day in interest, a sum larger than the entire market cap of TSMC, a leading global chipmaker. If the public debt interest rates saw a 300bp reduction, potential first-year savings might reach $174 billion with strategic refinancing.

Is a 300bp Rate Cut Realistic?

Achieving a 300bp cut seems very improbable given historical trends. Even during the financial tumult of 2008 or the COVID-19 crisis, such deep cuts were unseen. Historically, rates never dropped more than 100bp, positioning Trump’s request in the realm of unlikely scenarios.

The possible impact of such a decision is multifaceted. Economic expansion rates could exceed 3.8%, inflation rates might surge past the 5% mark, and similar to the events of 2020, stock markets and cryptocurrencies could witness a substantial spike.

Moreover, falling mortgage rates might inflate housing prices by over 25%, further fueling inflation. With reduced housing affordability, these benefits could be negated while the dollar index declines significantly.

“The dollar has started 2025 with its worst first and second quarter since 1973, with a -10.8% decline.” – TKL

Despite the complexities, such conditions might bolster U.S. trade capabilities. In Trump’s view, positioning his economic strategies alongside international moves like potential currency devaluations could see the U.S. influencing global trade, potentially impacting China’s role.

Amidst such ambitious proposals, the real world of economics shows that while a significant rate cut might seem attractive politically and ideologically, practical implications require careful consideration. Balancing short-term political gain with long-term economic stability remains a challenging task for policymakers.