Trump’s Push for a 1 Percent Federal Funds Rate Sparks Fears of Economic Instability

14 July 2025

President Trump’s recent appeal for the Federal Reserve to slash its benchmark interest rate to a stark 1 percent has ignited concern among economists and financial analysts, many of whom argue such a move could jeopardize U.S. economic stability. Traditionally, a 1 percent policy rate signals deep economic distress, characteristic of recessions not environments marked by near full employment, 2 percent growth, and inflation slightly above target. Many fear that implementing Trump’s proposal in current conditions would severely undermine trust in the central bank’s independence, potentially destabilizing long-term inflation expectations.

Since 1951, the Fed’s independence has been a cornerstone of economic policy, ensuring decisions remain data‑driven rather than politically influenced. However, Trump’s push to lower rates coincides with mounting deficits from recent tax cuts and federal spending, pushing the economy into a precarious fiscal landscape. Gregory Daco, chief economist at EY‑Parthenon, points out that cutting rates when growth is moderate and inflation remains roughly 2.5 percent would lack economic justification and could backfire. Furthermore, reducing the policy rate by such a magnitude risks losing the credibility required to maintain low inflation potentially triggering a costly spike in consumer prices.

Long‑term rates, such as those paid on U.S. Treasuries, are not set by the Fed but by global markets, where investor sentiment depends heavily on confidence in U.S. institutions. Desmond Lachman from the American Enterprise Institute warns that tamping with Fed independence risks triggering a flight from long‑term bonds and a declining dollar, potentially elevating borrowing costs for the Treasury rather than reducing them. If long‑term yields rise, government debt servicing costs could increase, working against the goal of lowering fiscal burdens.

Despite Trump’s pressure, analysts suggest the Fed will resist. With inflation tracking above its 2 percent goal and the labor market near full capacity, the economic rationale for a 3 percent cut to 1 percent is weak. In fact, many Fed officials maintain that measured, not drastic, rate adjustments are appropriate and that political meddling would destabilize markets .

Echoing concerns from 1970s-era inflationary pressures, experts warn that undermining Fed autonomy risks reigniting inflation expectations built on past interventions. Support for the Fed’s independence isn’t universal, however. The White House has sent signals of discontent, including open criticism of Fed Chair Powell and new appointees to oversight commissions scrutinizing Fed expenditures on its renovation plans. Treasury bond vigilantes, ever sensitive to shifts in central bank independence, reacted swiftly, U.S. Treasury yields ticked upward, and the dollar weakened, as markets digested the rising tension.

If Trump proceeded to replace Powell or place a more compliant figure at the helm, analysts warn it would greatly exacerbate market anxiety. Deutsche Bank cautions that even the threat of Powell’s removal represents a vastly underestimated risk, capable of shaking faith in U.S. monetary policy and triggering sharp global market reactions. The specter of such an intervention recalls Erdogan’s dismantling of central bank accountability in Turkey and Nixon’s inflationary challenges in the 1970s both cautionary tales for investors watching Washington.

Looking ahead, the Fed’s strategic review offers an opportunity to reassert its mandate for inflation control and economic stability. Maintaining consistent policy based on economic data, not political timelines, remains essential for sustaining investor confidence.

Trump’s push for a 1 percent rate is more than a policy shift, it is a challenge to the institutional boundaries that underpin century‑long economic governance. If enacted, such a dramatic pivot could spark inflation, distort bond markets, and irrevocably damage the credibility of the Fed. In the high‑stakes interplay between politics and economics, the outcome may redefine America’s fiscal future.