In a renewed push to influence U.S. monetary policy, former President Donald Trump called on the Federal Reserve to slash interest rates by a whole percentage point, escalating his long-running criticism of Fed Chair Jerome Powell.

Mocking Powell with the nickname “Too Late” on social media, Trump claimed the Fed’s hesitation to cut rates could be disastrous, even as he touted the country’s economic strength. The unusually large rate-cut demand underscores Trump’s continued efforts to pressure the central bank, a campaign that included a recent meeting with Powell at the White House. Trump also hinted at replacing Powell, whose official term expires in May 2026, suggesting an announcement on potential successors could come soon.

Beyond Bloviation: What Does This All Mean?

When the Federal Reserve lowers interest rates, it has a ripple effect across the economy, the stock market, and the bond market. Here’s a breakdown of how each is typically affected:

1. Effect on the Economy -- Goal: Boost economic growth and avoid recession.

• Lower interest rates = cheaper borrowing. This is the Fed’s way of stimulating economic activity.
• Consumer Spending Increases: Lower rates make loans (e.g., mortgages, auto loans, credit cards) cheaper, encouraging consumers to spend more.
• Business Investment Rises: Companies are more likely to borrow for expansion, hiring, and capital expenditures.
• Weaker Dollar: Lower rates can lead to a weaker U.S. dollar, boosting exports by making U.S. goods cheaper abroad.
• Inflation Pressure: Over time, increased spending can push prices up, which is often the Fed’s intention when inflation is below target.

 2. Effect on the Stock Market -- Lower interest rates tend to be bullish for stocks, at least in the short to medium term.

• Valuation Boost: Discounted cash flow models use interest rates; lower rates increase the present value of future earnings, making stocks more attractive.
• Growth and tech stocks usually benefit the most because their value is based more on future earnings.
• Dividend stocks may also rise, as their yields become more attractive compared to falling bond yields.
• Increased Risk Appetite: Investors tend to move money out of safe assets (like bonds) into riskier assets (like equities) when returns on the former fall.

3. Effect on the Bond Market

• The bond market reacts quickly and sensitively to interest rate changes.
• Prices Go Up: Bond prices and interest rates move inversely. Existing bonds with higher coupons become more attractive when rates fall, pushing prices up.
• Yields Drop: As demand for bonds rises (especially Treasuries), their yields decrease.

4. Yield Curve Impact

• Short-term rates drop directly.
• Long-term yields may or may not fall in tandem, depending on inflation expectations and economic outlook.
• If long-term rates don’t fall as much, the yield curve steepens; if they fall more, it inverts—a potential recession signal.

Bottom line...

Professional investors closely monitor anticipated changes to the federal funds interest rate, and these expectations are often priced into financial markets well before any official announcement.

By analyzing Federal Reserve statements, economic indicators, and market signals, investors adjust their portfolios accordingly, influencing everything from bond yields to stock valuations. As a result, the financial system tends to react not just to actual rate changes, but to the forecasts and sentiments surrounding them. In many cases, the market’s response happens before the Fed acts, demonstrating how deeply embedded these expectations are within the system.

When it comes to actual trades and positions, the little guy is screwed. However, in the best-case scenario, “a rising tide lifts all boats,” and it all works out with a healthier, more vibrant economy.

-- Steve