Source: Jinshi Data
As the saying goes, one's greatest enemy is oneself. When it comes to the Federal Reserve and interest rates, Trump has undoubtedly made his situation much more difficult.
Trump has repeatedly attacked Federal Reserve Chairman Powell, including using childish-like mockery and insults, which makes it almost impossible for Powell and his colleagues to cut short-term interest rates at the meeting early the next morning Beijing time, even if they had such an idea.
Any rate cut would likely be seen as yielding to White House pressure. It is hard to imagine that such an action would have any result other than damaging the Federal Reserve's reputation and people's confidence in the U.S. Treasury bond market. A few weeks ago, rumors sparked by Trump's own remarks that he might try to "fire" Powell were enough to cause a bond market crash.
At this stage, financial markets believe that the Federal Reserve will not only maintain short-term interest rates stable at this week's meeting but also likely do so at next month's meeting. The market believes the Fed may not cut rates until July, and even then, it might only be by 25 basis points.
If this is the case, the Federal Reserve may need to be prepared for an escalation of the U.S. President's anger. However, the President's subsequent attacks on the Federal Reserve might, in turn, further delay the date of rate cuts. This is not due to the Federal Reserve's stubbornness, but because Powell knows he needs to reassure bond investors that an independent Federal Reserve will guard their investments and protect the value of their funds.
If he cannot do this, U.S. Treasury bonds may not attract as many investors in the future. No one wants to see their money go up in flames.
Ironically, some financial data is beginning to move in the direction Trump hopes, though perhaps not for the reasons he claims. For example, inflation expectations are declining. The five-year inflation expectation in the bond market, also known as the break-even inflation rate, has recently dropped to 2.33%, a significant improvement compared to over 2.6% in February.
The main reason is that Trump's large-scale tariff measures on April 2 triggered economic turmoil and uncertainty.
The Atlanta Fed reduced its real-time forecast for second-quarter economic growth by more than half within days, from 2.4% to 1.1%. According to the U.S. Institute for Supply Management (ISM), manufacturing has contracted for the second consecutive month in April, though services continue to expand.
However, these data showing economic slowdown have not helped the bond market much. Trump's angry accusations about the Federal Reserve and interest rates, plus the fact that he will appoint Powell's successor next year, have made investors nervous. For obvious reasons, overseas investors may also be selling bonds.
Currently, the yield on 10-year U.S. Treasury bonds is about 4.33%, and the 30-year fixed-rate mortgage rate, closely related to the 10-year Treasury bond yield, is 6.76%, higher than last summer's level.
Trump needs this rate to drop significantly. This is key to reviving the real estate market, where many homeowners refuse to move because they cannot find fixed-rate loans like before (when rates were 3% or 4%).
Analysts at JPMorgan believe that the real estate market will not truly recover unless the 30-year fixed-rate mortgage rate drops to 5%.
To achieve this, the bond market must regain confidence in the Federal Reserve's independence. The last time the average 30-year fixed-rate mortgage rate was 5%, the 10-year U.S. Treasury bond yield was 2.6%. If Trump wants to help himself, he can stop talking about the Federal Reserve.
