Why the Federal Reserve wants to avoid an aggressive rate cut

Summary

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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

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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.

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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.

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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)

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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

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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.

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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.

Transcript

[Scott Besant]

Npr.

[Paddy Hirsch]

This is the Indicator from Planet Money. I'm Paddy Hirsch.

[Adrian Ma]

And I'm Adrian Ma. It's an exciting week for the indicator because we find out tomorrow how much the Federal Reserve will cut interest rates. And while it looks like there will be a cut, it's not clear just how deep that cut will be. Now, the smart money, the analysts and Wall street types, they're predicting maybe a quarter of a percentage point cut or maybe a half a percentage point.

[Paddy Hirsch]

Well, who knows? But however deep the Fed goes, it probably won't be deep enough for President Trump. On his social media platform Truth Social. A couple of months ago, Trump wrote Fed should cut rates by 3 points. Very low inflation, $1 trillion a year would be saved.

[Adrian Ma]

Were there any exclamation points there?

[Paddy Hirsch]

Oh yes, three.

[Adrian Ma]

Three exclamation points for, I guess a requested three percentage point reduction. Or maybe if you want to be fancy about it, call it 300 basis points.

[Paddy Hirsch]

We're fancy.

[Adrian Ma]

And you know, a cut of that size would take the Fed funds rate from 4.5% today to just one and a half percent. That would be a massive cut.

[Paddy Hirsch]

Massive indeed. So on today's show, we'll look at what might happen if the President got his way and the Fed did indeed cut rate by 3 percentage points. What would that do to inflation, to mortgage rates? Would it save a trillion dollars a year as Mr. Trump claims? We'll explore it all after the break.

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[Paddy Hirsch]

Not an incautious animal. 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.

[Adrian Ma]

I like the image of a tiptoeing elephant.

[Paddy Hirsch]

Yeah, they have this thing where they hollow out their feet. They're really super stealthy when they want to be.

[Adrian Ma]

Okay. So the point being that the Fed can move fast and aggressively when it wants, but normally with interest rate movements, they only make those in very small and incremental ways. A quarter point here, maybe a half point there. So very gingerly making these interest rate moves.

[Paddy Hirsch]

Gingerly, yeah. So while President Trump leads the Republican Party and the party symbol is indeed an elephant, his call for a 3 percentage point cut to the base interest rate, well, that's more RINO than dumbo.

[Michael Strain]

He's focused on the rates that people pay for home mortgages.

[Paddy Hirsch]

Michael Strain is an economist at the American Enterprise Institute. That's a think tank that leans to the right.

[Michael Strain]

He's focused on the rates that businesses pay for longer term projects. He's focused on car loans, you know, things of that nature.

[Adrian Ma]

Loans of that nature tend to be longer term deals like a 30 year mortgage or a 7 year corporate loan or an 8 year car loan. Trump wants to bring interest rates on these kinds of loans down. But there's a problem.

[Michael Strain]

I think the President is fundamentally confused about how those longer term interest rates work.

[Paddy Hirsch]

Yeah. As all loyal indicator listeners know, the Fed effectively sets the base rate, the rate at which banks borrow from each other overnight. Michael says that overnight rate has a big impact on short term interest rates like a six month bond or a one or two year bond.

[Michael Strain]

But when you're talking about 30 year mortgage interest rates, when you're talking about rates on securities of that duration, those are really determined by market forces.

[Adrian Ma]

Market forces as in supply and demand. Kamal Sree Kumar is president of Sri Kumar Global Strategies. He advises institutions on investment risks in different countries around the world. Sri says a deep rate cut would have a big effect on the demand side of the equation.

[Scott Besant]

It is going to put an enormous amount of cash into consumer wallets.

[Paddy Hirsch]

Yeah. It would indeed make it way cheaper to borrow short term. But cheaper money means easier money means.

[Scott Besant]

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.

[Paddy Hirsch]

Inflation as we know it makes money that's been borrowed worth a lot less when it's eventually paid back. So lenders need to find ways to compensate for that erosion in value over the long term and also plan for the risk of even higher inflation down the road.

[Adrian Ma]

So how do they do this? By charging higher rates on longer term loans like car loans. And corporate loans, they all start getting more expensive. And the more expensive the loans become, the fewer people that are qualified for them.

[Scott Besant]

The same calculation goes for mortgage rates at 12, and that means that the mortgage rate goes up. Given your level of income, your employment status, your debt history, your. 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. Yeesh.

[Paddy Hirsch]

All right, so a deep cut in interest rates would likely end up being bad for individuals and businesses. Higher inflation and rising interest rates on consumer and corporate loans. But what about the government? Could a three point cut save the government a trillion dollars a year like Mr. Trump says?

[Adrian Ma]

TRUMP appears to be talking about the amount of interest we pay on U.S. government debt. This year. It'll stack up to about $952 billion. And the president's thinking that a big cut in the fed funds rate will bring down the rate on longer term government debt. Stuff like the ten year treasury note.

[Paddy Hirsch]

Yeah, but just like with consumer loans, the interest rates on long term Treasuries are driven primarily by the market, not by the Fed. If the Fed does the President's bidding and slashes the base rate, the big funds that buy a lot of this treasury debt are likely to predict an increase in inflation. And they'll react accordingly.

[Scott Besant]

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. Once that happens.

[Adrian Ma]

In other words, a deep, steep rate cut by the Fed wouldn't do what Trump thinks it would. Instead, it would probably do the opposite. Inflation would almost certainly rise. Long term interest rates would probably increase. Government borrowing costs would likely grow.

[Paddy Hirsch]

And Mike Strain with the American Enterprise Institute says if the cut came because the President ordered it, that could do real long term damage. Beyond the considerable fiscal and economic costs.

[Michael Strain]

Investors would perceive holding government 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.

[Adrian Ma]

Michael says those institutions, like the Federal Reserve are a foundation of American prosperity, underpinned by their independence from the President and from politics. And that independence looks increasingly threatened as Trump works to stack these institutions with loyalists like Steven Myron, who is confirmed as a Fed governor this week.

[Michael Strain]

And if the Fed were to cut interest rates by 300 basis points, that would be a pretty big crack in the foundation of prosperity and that would make, you know, the whole, the whole house on which that foundation rests less stable and less secure.

[Paddy Hirsch]

Both Michael and Sri agree that Mr. Trump's desire to bring long term interest rates down is a good one. High rates on consumer and corporate loans and mortgages are a threat to growth and to the biggest engines of the economy. And high rates on government debt raise the government's operating costs and add to that debt load.

[Adrian Ma]

But they say using the Fed to drive these rates down is most definitely not the way to go. Sri says at least some of Trump's people seem to understand that Scott Besant.

[Scott Besant]

Having been a very successful hedge fund manager in his past, is bright enough, intelligent enough, and he did say what we are planning to do is to cut the 10 year yield. We are not trying to work on the federal funds rate which is the only thing the Fed controls.

[Adrian Ma]

Well, the Treasury Secretary is on record saying he thinks the fed funds rate should be a lot lower.

[Paddy Hirsch]

That is true, but he's not talking about a massive one time cut. He's talking about starting with a 50 basis point reduction, which is more tiptoeing elephant than charging rhino. So he seems to get it. Hopefully he can explain that to his boss.

[Adrian Ma]

This episode was produced by Corey Bridges with engineering by Robert Rodriguez. It was fact checked by Sierra Juarez Edited by Julia Richie. Kate Cannon is our editor and the indicators of production of npr.

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