Trump Says Fed Should Cut Rates to 'Zero, or Less,' Attacks Jerome Powell Again -- 3rd Update
By Kate Davidson and Catherine Lucey
WASHINGTON -- President Trump renewed his call for lower interest rates and his criticism of the Federal Reserve on Wednesday, by pressing for the central bank to cut short-term rates to "ZERO, or less," negative rates that the U.S. avoided even after the 2008 financial crisis.
For weeks, Mr. Trump has pushed for lower rates to help cushion the economy against fears of a broader global slowdown. On Wednesday, he introduced a different argument for rate cuts by saying it would allow the U.S. to lock in lower interest rates for a longer period of time.
"We should then start to refinance our debt," he wrote on Twitter, arguing it would reduce interest costs "while at the same time substantially lengthening the term."
But some economists, including one of Mr. Trump's former advisers, warned that his push for lower short-term interest rates might make it harder to achieve the stated goal of locking in lower rates, because it could send up long-term Treasury yields.
The tweets marked the latest escalation of Mr. Trump's pressure on the Fed and attacks on Chairman Jerome Powell, whom the president picked for the post in 2017. Mr. Trump said the U.S. should always be paying the lowest rate and complained that the "naivete" of Mr. Powell and the Fed means that this was a "once in a lifetime opportunity that we are missing because of 'Boneheads.' "
A Fed spokeswoman declined to comment on the tweets. Mr. Powell has previously defended the Fed's tradition of independence from political pressure.
After cutting their benchmark interest rate in July by a quarter percentage point, Fed officials are gearing up to cut rates again, likely by another quarter point, at their Sept. 17-18 policy meeting.
Mr. Powell framed the July decision to lower the Fed's benchmark short-term rate to a range between 2% and 2.25% as a "mid-cycle adjustment." The global growth and trade outlook has deteriorated since then amid an escalation in Mr. Trump's trade war with China.
Economists warn that pushing short-term interest rates to near zero could signal that Fed officials expect a much deeper economic downturn.
"That could have the unintended consequence of triggering a major drop in confidence in the economy that could precipitate a recession, which would have the opposite effect," said Diane Swonk, chief economist at Grant Thornton.
Lowering rates all the way to zero now, when the economy is still on solid footing, could also leave the Fed without any ammunition if an actual recession hits, Ms. Swonk said.
Some economists were also skeptical that pushing interest rates to zero would actually lead to lower interest costs on government debt.
Mr. Trump has previously floated the idea of refinancing the U.S.'s nearly $17 trillion in publicly held debt, which has jumped in the wake of Republican tax cuts and bipartisan budget deals that boosted federal deficits.
"I would like to see the rates be low and pay amortization, pay off debt, " Mr. Trump said in an October 2018 interview with The Wall Street Journal, complaining that the Fed had made this difficult by raising rates several times in recent years.
Debt-servicing costs are one of the fastest growing drivers of federal spending: Interest payments have increased nearly 10% so far this fiscal year, totaling $497.2 billion through July, roughly $1.6 billion a day, according to the Treasury Department.
It isn't exactly clear what Mr. Trump envisions. Sovereign debt is different from mortgage debt, and can't be renegotiated to reduce monthly payments or pay debt off early. But the Treasury can replace maturing government securities with new, long-term debt at lower interest rates, which could bring down costs.
"The Treasury should start issuing debt in much longer terms," said Stephen Moore, an economic adviser to Mr. Trump's 2016 campaign who at one point was under consideration for a slot on the Fed board, in a Wall Street Journal op-ed last month. "This would lock in today's low interest rates on the national debt for 10, 20, 30 years or perhaps even longer."
Ernie Tedeschi, an economist at Evercore ISI, said such an idea makes sense, but it is something that the Treasury is already doing. The average length to maturity of publicly held federal debt has risen to 66 months, from 46 months at the height of the 2008 financial crisis.
The Treasury has also asked an advisory group to reconsider the potential benefits of issuing ultra-long bonds, as other countries have done.
Lowering the Fed's benchmark federal-funds rate to zero wouldn't automatically translate to lower interest rates on government debt, which is determined by bond markets, Mr. Tedeschi said. While short-term interest costs would likely fall, "it could be that the 10-year [Treasury note] goes up because markets are more confident in the Fed management of the economy," he said, a shift that would lead to higher interest costs.
Paul Winfree, the director of the Heritage Foundation's Roe Institute for Economic Policy Studies and a former budget adviser to Mr. Trump, said the president's argument is "economically inaccurate."
"Treasury has to offer interest rates that will attract buyers," he said. "If all of a sudden we decide to roll over all of our debt, well, that will surely influence the interest rate on the debt. Like if all of a sudden every household in America decided to refinance."
Mr. Trump said last month that the Fed should cut its benchmark interest rate by at least a full percentage point and resume its crisis-era program of buying bonds to lower long-term borrowing costs. Such moves would typically be considered only when the economy faces a substantial downturn.
Wednesday's comments are the first time Mr. Trump has called for rates below zero. In response to a reporter's question several weeks ago, Mr. Trump said he didn't want negative rates.
Yields in some countries, including Germany, France and the Netherlands, have fallen below zero already. On Tuesday, JPMorgan Chase & Co. Chief Executive James Dimon said the bank has begun discussing what fees and charges it could introduce if interest rates go to zero or lower. Even during the last recession, the Fed didn't employ negative rates.
Mr. Trump and White House officials have said they don't believe the U.S. is headed toward a slowdown, but also have floated other ideas, such as tax cuts, to boost the economy.
A rate cut of the magnitude Mr. Trump is calling for hasn't happened since the global financial crisis in late 2008.
In comments last week, Mr. Powell said the U.S. economy faced a favorable outlook despite significant risks from weaker global growth and trade uncertainty.
--Paul Kiernan contributed to this article.
Write to Kate Davidson at email@example.com and Catherine Lucey at firstname.lastname@example.org