The Indicator from Planet Money

Episode: Why the Federal Reserve wants to avoid an aggressive rate cut
Date: September 16, 2025
Hosts: Paddy Hirsch & Adrian Ma

Episode Overview

This episode explores why the Federal Reserve is expected to cut interest rates only modestly, despite calls for much deeper cuts from President Trump and his allies. The hosts, joined by economists Michael Strain and Kamal Sree Kumar (Sri Kumar), break down the potential economic consequences of a massive rate cut, debunk some common misconceptions about how interest rates work, and reflect on the risks posed to U.S. economic stability and institutional independence.

Key Discussion Points & Insights

1. Setting the Stage: Rate Cuts and Political Pressure

• Upcoming Fed Decision: The Federal Reserve is set to announce a possible interest rate cut, with analysts predicting a modest reduction (0.25–0.5 percentage points).
• President Trump’s Demands: Trump has publicly called for a dramatic 3 percentage point (300 basis point) rate cut, claiming it would save $1 trillion annually.
  • "Fed should cut rates by 3 points. Very low inflation, $1 trillion a year would be saved!!!" — Read from Trump’s social media post (00:38, Hirsch)
• Comparison: Such a cut would drop the federal funds rate from 4.5% to 1.5%, an extremely aggressive move.

2. The Fed’s Cautious Approach

• Metaphor: The Fed is compared to “a 20,000 pound elephant tiptoeing through the trees,” rarely making abrupt moves (02:55, Hirsch).
  • “It is not your 3000 pound rhinoceros thundering across the savannah. No, it's more like your 20,000 pound elephant tiptoeing through the trees.” — Paddy Hirsch (02:55)

3. How Interest Rates Actually Work

• Base Rate vs. Long-Term Rates:
  • The Fed controls the overnight (base) rate, affecting short-term interest rates, but market forces largely determine long-term rates (like 30-year mortgages and 10-year Treasuries).
  • “When you're talking about 30 year mortgage interest rates, those are really determined by market forces.” — Michael Strain (04:40)
• Common Misconception: Trump’s focus on dropping long-term rates by slashing the base rate shows a fundamental misunderstanding.
  • “I think the President is fundamentally confused about how those longer term interest rates work.” — Michael Strain (04:19)

4. The Dangers of a Deep Rate Cut

• Short-Term Gains, Long-Term Pain:
  • A deep cut would put a lot of cash into consumer wallets, making borrowing much cheaper — at least in the short term.
  • “It is going to put an enormous amount of cash into consumer wallets.” — Sri Kumar (05:08)
• Resulting Inflation:
  • “More money means that means inflation will go up even as the federal funds rate, six month treasury bill and two year treasury yields all come down.” — Scott Besant (05:19)
  • Lenders would then raise long-term rates to compensate for inflation risk, making mortgages and corporate loans even more expensive.
  • “The mortgage rate goes up... you do not qualify for a mortgage at a higher rate. So mortgages are hit, demand for housing is hit, and then you end up with a much lower rate of growth than otherwise.” — Scott Besant (05:58)

5. Debunking the "$1 Trillion Saved" Claim

• Trump’s Logic: Assumes government borrowing costs (interest on national debt) would fall in line with the fed funds rate.
• Reality: Long-term Treasury yields are set by investors, who would demand higher yields if they expect inflation to rise after a big rate cut.
  • “If today you have an interest rate of say 4.3% on the 10 year, they don't want to lend Uncle Sam for the next 10 years for 4.3%, they think they'll be losers, so they're going to demand a higher yield on it. Which means that 10 year, 30 year yields increase and the US Treasury's debt servicing expenses actually shoot up.” — Scott Besant (07:15)
• Net Effect: Far from saving $1 trillion, debt service costs might increase.

6. Institutional Independence at Risk

• Threats to the Fed: If a massive cut were undertaken at the President’s insistence, investor trust in U.S. government debt could erode.
  • “Investors would perceive holding U.S. government debt to be riskier... They would see an erosion in the norms and institutions here in the United States.” — Michael Strain (08:08)
• Importance of an Independent Fed: The Fed’s apolitical approach is foundational to prosperity; direct political interference would destabilize the economy.

7. Alternative Perspectives & Acknowledgments

• Long-Term Interest Rates Matter: Everyone agrees that high rates on consumer/corporate loans and government debt are a problem.
• The Right Way to Lower Rates: The path to lower long-term rates isn’t through reckless Fed action.
  • “Sri says at least some of Trump's people seem to understand that... We are not trying to work on the federal funds rate which is the only thing the Fed controls.” — Adrian Ma on Scott Besant (09:31–09:49)
  • More modest, incremental (“tiptoeing elephant”) changes are in discussion, not the drastic “charging rhino” slashes.

Notable Quotes & Memorable Moments

• “It is not your 3000 pound rhinoceros thundering across the savannah. No, it's more like your 20,000 pound elephant tiptoeing through the trees.”
  — Paddy Hirsch (02:55)
• “I think the President is fundamentally confused about how those longer term interest rates work.”
  — Michael Strain (04:19)
• “It is going to put an enormous amount of cash into consumer wallets.”
  — Sri Kumar (05:08)
• “The mortgage rate goes up... So mortgages are hit, demand for housing is hit, and then you end up with a much lower rate of growth than otherwise. Yeesh.”
  — Scott Besant (05:58)
• “Investors would perceive holding U.S. government debt to be riskier than they had previously perceived it to be. They would see an erosion in the norms and institutions here in the United States.”
  — Michael Strain (08:08)
• “A massive one time cut... is more charging rhino than tiptoeing elephant.”
  — Paddy Hirsch (09:54)

Timeline of Key Segments

• 00:14–01:19 – Setting up the stakes: Fed’s decision, political pressure, Trump’s demands
• 02:55–03:46 – Analogy & Fed’s cautious style vs. Trump’s aggressive ask
• 03:46–04:52 – Explaining the difference between short-term and long-term interest rates
• 05:08–06:22 – Consequences of a deep rate cut: inflation, higher long-term rates, bad for borrowers
• 06:39–07:42 – The "$1 trillion saved" claim debunked
• 07:57–08:42 – Institutional risks: independence of the Fed, investor confidence
• 09:01–09:54 – Agreement on the goal, disagreement on the means; recognizing some nuance among Trump advisors

Conclusion

The episode concludes that while lowering long-term interest rates is an understandable aim, using the Fed to sharply slash short-term rates is both ineffective and risky. The real drivers of long-term borrowing costs are market expectations around inflation and fiscal responsibility. Political pressure on the Fed threatens U.S. economic stability and the invaluable trust in its institutions.

For listeners: This concise but thorough episode illuminates why the Fed’s renowned caution is key for economic stability, and why apparently bold solutions—like a massive rate cut—can backfire.