President Donald Trump has once again resumed his pressure tactics against the Federal Reserve to cut interest rates, noting that dramatically cheaper borrowing could unleash an unprecedented US economic boom. However, economists argue quite the opposite and warn that such a move could reignite inflation.
The demand came from the US jobs report, which showed nonfarm payrolls increased 162,000 last month, and July’s job losses were revised away, suggesting the labour market has more momentum than previously thought. But instead of celebrating the data as evidence that his economy is gaining momentum, Trump turned the heat on financial markets and the Federal Reserve about inflation and interest rates.
He objected to the widely accepted economic notion that the surprise gain of 162,000 jobs in August could contribute to inflationary pressures.
"Success does not cause inflation. Stupidity causes inflation," Trump vented in the Oval Office, as he declared it "crazy" that the stock markets fell on Friday on inflation concerns.
Trump argued that the answer was lower interest rates, claiming that the US economy could expand at an extraordinary rate if borrowing costs were reduced.
“We could have a GDP that would break every single record,” Trump said, adding that growth could reach “12, 13, 14, 15 per cent” with lower rates.
"We could have a GDP that would break every single record," Trump said.
That puts Trump at odds with the conventional monetary-policy argument that cutting rates helps money flow into the US economy, and the potential influx of cash could make inflation even worse, adding to his political and economic headaches. In fact, the latest jobs data has made some economists think the Fed should hold off on cutting rates, or even raise them, if inflation stays high.
The contradiction is significant because Trump's own economic agenda has contributed to some of the current economic pressures. Rates have been climbing in response to persistently high inflation fuelled by Trump's tariffs and oil shortages caused by the war in Iran. The national debt has now crossed the daunting threshold of USD 40 trillion, and the 10-year US Treasury note rate rose to 4.79% on Friday.
And, as the promised growth has yet to materialise, the president has lost some of the public's trust in his ability to steer the world's largest economy. The president's approval rating on the economy was a lowly 32% in the middle of the summer, according to polling by The Associated Press-NORC Centre for Public Affairs Research. When Republicans were last facing midterm voters in 2018 under Trump, his economic approval rating was 50%.
"The administration's credibility on growth, inflation, rates, debt and deficit dynamics have taken a hit given the outsized predictions that are not aligned with economic reality," said Joe Brusuelas, chief economist at the consultancy RSM US.
Trump's economic team, however, remains more optimistic. They say the development of artificial intelligence will increase productivity and boost growth.
Christopher Phelan, chairman of the White House Council of Economic Advisers, said, “I expect higher growth,” adding, “We're doing stuff to make good things happen.”
But economists caution against betting on a best-case scenario.
Tedeschi said he would be "thrilled" if AI could help deliver those kinds of gains for 10 straight years, but history shows that growth that large, driven by advancements in computers, was likely "wildly optimistic."
