In the realm of economic policy, there are times when ambition and political rhetoric can overshadow basic numerical coherence.
President Donald Trump’s recent declaration at the World Economic Forum in Davos that he will “demand that interest rates drop immediately” while simultaneously championing protectionist tariffs is a glaring example of this kind of inconsistency (see here).
This is a policy cocktail that risks sending the U.S. economy down a precarious path, eerily reminiscent of Turkey under President Erdogan.
In his speech, Trump did not explicitly name the Federal Reserve but made it clear that he intends to exert pressure to bring down interest rates, stating, “Interest rates should follow us all over.”
This statement, coupled with his frequent criticisms of Fed Chair Jerome Powell—including calling policymakers “boneheads”—illustrates the contentious relationship he has maintained with the central bank.
Trump’s remarks come as markets anticipate the Fed’s upcoming policy meeting, where traders see almost no chance of further rate cuts despite his demands.
Let’s dissect why this approach is economically self-contradictory and potentially disastrous.
The Tariff-Interest Rate Nexus
Every time President Trump amplifies his “I love tariffs” rhetoric, U.S. Treasury yields have tended to rise.
This is no coincidence. The U.S. trade deficit is effectively mirrored by foreign financing of the American budget deficit. If international trade collapses due to aggressive tariff policies, this crucial source of financing also dries up.
The logical result? Treasury yields will skyrocket as the U.S. government is forced to rely more heavily on domestic financing to cover its deficits.
Trump’s insistence on lower interest rates—if imposed through pressure on the Federal Reserve—would be akin to trying to plug a financial dam with duct tape.
If the Fed attempts to suppress market-driven interest rate increases while international financing dwindles, the likely outcomes are clear: the dollar collapses, inflation surges, and U.S. financial markets spiral into chaos.
This is exactly what we saw unfold in Turkey. Erdogan’s obsession with low interest rates, combined with economic policies that defied market fundamentals, triggered a collapse of the lira, runaway inflation, and rising interest rates—the very opposite of what he intended. Trump’s plan risks steering the U.S. economy into a similar maelstrom.
No more rate cuts
As I’ve noted before, there is simply no room left for rate cuts in the current environment (see here and here).
The Federal Reserve has already undertaken a significant rate-cutting cycle, and further easing would risk fueling inflationary pressures. What’s more, the more President Trump talks about tariffs, the more likely it becomes that the Fed will have to hike rates rather than cut them.
Protectionist trade policies introduce inflationary risks.
Markets are already reacting to this reality, with Treasury yields edging higher whenever Trump reiterates his tariff agenda. Should these pressures persist, the Fed’s hand may be forced into tightening monetary policy to contain inflation, despite political pressure to do the opposite.
The Illusion of Control
It’s worth noting that the Federal Reserve, led by Jerome Powell, has consistently emphasized the importance of its independence from political pressure. The Fed’s mandate is to manage inflation and employment, not to cater to the whims of any administration.
While Trump may nominate Fed governors, he does not have statutory authority to dictate monetary policy. And this separation is vital to maintaining market stability.
Yet Trump’s rhetoric—“Interest rates should follow us all over the world”—reflects a fundamental misunderstanding of how global markets operate. The Fed’s role is not to lead a synchronized global rate cut. Each country’s monetary policy is shaped by domestic economic conditions. Forcing the Fed’s hand in this manner risks eroding its credibility, which could have long-term consequences for market stability.
Inflation’s Role in the Equation
Ironically, Trump has criticized inflation under his predecessor, yet his proposed policies could reignite inflationary pressures. By attempting to artificially suppress interest rates while tariffs drive up import costs, he risks a surge in consumer prices.
Inflation, far from being “transitory,” could become entrenched, forcing the Fed to implement even more aggressive rate hikes in the future. This is a lose-lose scenario for American consumers and businesses.
A Worrying Parallel
The parallels between Trump’s proposals and the dynamics of the 1970s are troubling. When political pressure overrides sound economic decision-making, inflation risks not only increase but can become deeply embedded. Even small missteps in this environment could have dramatic consequences.
The real solution lies in fostering open trade, ensuring fiscal discipline, and allowing the Federal Reserve to operate independently. Protectionism and monetary manipulation may offer short-term political wins, but they come at the expense of long-term economic health.
If there’s one lesson we can draw from Turkey’s experience, it’s that markets have a way of reasserting themselves, often in painful ways. Let’s hope policymakers in the U.S. take note before it’s too late.