Trump wants much lower interest rates. Is that a good idea?
- - Trump wants much lower interest rates. Is that a good idea?
MAX ZAHNJanuary 16, 2026 at 6:44 PM
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Trump wants much lower interest rates. Is that a good idea?
President Donald Trump’s monthslong push for a sharp reduction of interest rates drew renewed attention this week, when news surfaced of an unprecedented federal criminal investigation into Federal Reserve Chair Jerome Powell.
Trump repeated his call for lower rates after the investigation became public. “Jerome ‘Too Late’ Powell should cut interest rates, MEANINGFULLY!!!” Trump said in a social media post on Tuesday.
The probe appears to center on Powell’s testimony to Congress last year about a multi-billion-dollar office renovation project.
Powell, who was appointed by Trump in 2017, issued a rare video message on Sunday night rebuking the investigation as a politically motivated effort to influence the Fed's interest rate policy.
When he appointed Powell, Trump cited Powell's tenure as member of the Federal Reserve Board, which had begun five years earlier, as well as his skill as a "consensus builder."
Trump denied any involvement in the criminal investigation during a brief interview with NBC News.
"I don’t know anything about it, but he’s certainly not very good at the Fed, and he’s not very good at building buildings," Trump said.
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The high-stakes clash between the White House and the central bank offers an opportunity to revisit Trump’s policy goal. ABC News asked several economists whether far lower rates are a good idea.
Most economists cast doubt on the proposal, saying a large rate cut risks overheating the economy and driving up already-elevated inflation. At least one economist disagreed with them, saying much-reduced rates could boost a flagging labor market and prevent a possible economic slowdown.
Despite those differences, economists shared a belief in the need for an independent Federal Reserve Board insulated from the White House. They cautioned that a perceived attempt to influence the central bank could complicate its stewardship of the economy.
Over the past year, hiring has slowed dramatically while inflation has remained elevated, risking an economic double-whammy known as “stagflation.” Those conditions have put the Fed in a difficult position, some economists said.
The central bank must balance a dual mandate to keep inflation under control and maximize employment. To address pressure on both of its goals, the Fed primarily holds a single tool: interest rates.
Starting in September, the Fed cut interest rates at three consecutive meetings, aiming to boost the labor market. The benchmark rate stands at a level between 3.5% and 3.75%.
Futures markets expect two quarter-point interest rate cuts this year, forecasting the first in April and a second in the fall, according to CME FedWatch Tool, a measure of market sentiment.
Speaking at a press conference in Washington, D.C., last month, Powell suggested the central bank may be cautious about further rate reductions.
"We're well positioned to wait and see how the economy evolves," Powell said.
Trump has called for a more rapid and extensive reduction of interest rates. In an interview with The Wall Street Journal in December, Trump said within a year he wants interest rates to be “1% and maybe lower than that.”
In theory, lower interest rates could help revive the ailing labor market, representing a choice to prioritize job growth while taking on a tolerable risk of higher inflation, some analysts said. But they warned the extent and pace of cuts proposed by Trump goes well beyond that approach, threatening to supercharge demand with low borrowing costs that may significantly hike prices.
Alex Wong/Getty Images - PHOTO: Workers are seen at the Federal Reserve renovation site on Jan. 14, 2026, in Washington, D.C.
Kenneth Kuttner, a professor of economics at Williams College who studies central bank policy, described the proposal as “unquestionably inflationary.”
“That would not help the affordability problem,” Kuttner added.
“There are bonafide arguments for further cuts but not all the way to 1%,” Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former Federal Reserve official, told ABC News about Trump’s approach. “I can’t see a bonafide argument for that.”
One economist voiced support for Trump’s proposed rate cuts, however.
Yeva Nersisyan, a professor of economics at Franklin & Marshall College, questioned the effectiveness of interest-rate policy as a means of controlling inflation, saying it cannot target specific costs -- such as housing -- which account for the lion's share of price hikes.
“To the extent that interest rates don't really address the causes of inflation and instead might hurt the economy and slow down the job market, then they’re really not doing any good and only doing harm,” Nersisyan told ABC News.
“I don’t think it’s a bad idea to bring interest rates down to 1%,” Nersisyan said, while noting that the benefits of the policy may prove more modest than Trump expects.
A longstanding norm of independence usually insulates the Fed from direct political interference.
In the event a central bank lacks independence, policymakers tend to favor lower interest rates as a means of boosting short-term economic activity, some economists said. Such a posture could pose a major risk of yearslong inflation fueled by a rise in consumer demand, untethered by interest rates.
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Some economists warned a perceived attempt to undermine the Fed’s independence could make investors and consumers skittish if Trump’s proposed cuts were to take effect, since the policy could indicate success in the erosion of that independence.
Others downplayed the likelihood of a meaningful loss of Fed independence, since news of the DOJ investigation of Powell drew a rare degree of Republican opposition. Powell holds only a single vote on the 12-member board responsible for setting interest rates, they said.
“Anytime we’re changing institutions, we should have some concern,” William Luther, a professor of economics at Florida Atlantic University, told ABC News. “At the same time, we should recognize the institutional safeguards we have are pretty strong.”
Source: “AOL Money”
