“Central Bank Is The Government's Handmaiden”…Trump, Aims For Financial Control By Pressuring For Interest Rate Cuts

Trump President, who set interest rate cuts as the next target after passing the tax cut bill (source: Fox Business)

Donald Trump, President of the United States, is intensifying pressure on the Federal Reserve (Fed). An analysis has been raised that he is pursuing a ‘Fiscal Dominance’ strategy by demanding a Fed interest rate cut to maintain the recently passed large-scale tax cut bill.

On the 5th (local time), *Wall Street Journal (WSJ)* reported that Trump plans to endure the huge fiscal deficit caused by tax cuts through lowering the base interest rate rather than issuing long-term government bonds. He publicly stated, “I will put someone in the Fed who can lower interest rates,” and revealed his intention to directly intervene in the selection of a successor to Jerome Powell, Chairman of the Fed.

Fiscal dominance refers to a structure in which the government undermines the independence of the central bank and makes monetary policy a subordinate means of fiscal policy. Although this is commonly seen in emerging countries such as Argentina, controversy is growing over the fact that similar signs are appearing in the United States today.

This tax cut bill raises funds through massive government bond issuance. However, traditionally, as government bonds increase, long-term interest rates rise and the effect of tax cuts diminishes. To prevent this, Trump is turning to short-term government bonds for funding and trying to suppress overall financing costs through interest rate cuts. However, there are also concerns that short-term interest rates may rise more quickly depending on market conditions, potentially increasing the fiscal burden.

In fact, the market is reacting to this change. Despite the House Republicans' budget plan predicting the federal government's fiscal deficit will reach 7.1% of GDP over the next 10 years, the 10-year treasury yield recently fell to 4.35%. This is interpreted as a reflection of the expectation that if the next Fed chair is a Trump-oriented person, a base interest rate cut will become a reality.

Wall Street experts warned that while the current low-interest rate policy can have a short-term economic stimulus effect, it can also carry the cost of inflation and weakened monetary trust in the long term. Goldman Sachs predicted through a report that “a successor to Powell is likely to prioritize economic stimulus over fiscal deficits.”

From a political standpoint, bringing the central bank into the political framework may be a short-term victory. However, historically, when the independence of the central bank was compromised, the cost inevitably followed over time. Attention is focused on what consequences Trump-style fiscal dominance experiments will have on the U.S. economy.