Trump launches a new move! Linking interest rates to trade deficits: if you don't cut interest rates, consider stopping doing business with countries with trade deficits

The Zhitong Finance App learned that US President Trump once again put strong pressure on the Federal Reserve to cut interest rates on Friday, and rarely directly linked monetary policy to trade policy. Trump said that the Federal Reserve should drastically reduce interest rates, otherwise he will stop trading with countries that have trade deficits with the US. This tough statement was made after the US non-farm payrolls data for August far exceeded expectations, and strong employment data may have further weakened the reason for the Fed to cut interest rates.

At the same time, Trump directly called out Federal Reserve Chairman Walsh, demanding that the Federal Reserve be “smarter,” adding that high interest rates put the US at an “unfair disadvantage” in global competition.

Non-agricultural agriculture far exceeded expectations, yet Trump asked the Federal Reserve to cut interest rates drastically

Trump posted on social media on Friday that the newly released employment data “greatly exceeded all expectations,” and specifically mentioned that US employers added 162,000 jobs in August.

Although strong job market performance usually means there is no urgent need for the Federal Reserve to cut interest rates, Trump has given a very different logic. He believes that the US economy and credit conditions have improved markedly, so they should get lower financing costs.

Trump said that a stronger country means better credit, and better credit should correspond to lower interest rates. He even believes that the US should have the “lowest interest rate in the world” as it did in the past. He then pointed the finger directly at the Federal Reserve, demanding that Walsh and other Fed officials lower interest rates, and called on the Federal Reserve officials to “act like patriots.”

The Federal Reserve declined to comment on Trump's post.

“Cut interest rates or stop trade” Trump links interest rates to trade deficits

Trump's most interesting statement this time is the first time that the request for the Federal Reserve to cut interest rates is directly linked to the US foreign trade policy. He said that if the Federal Reserve does not lower interest rates, he will consider stopping trade with countries that have trade deficits with the US, adding that this method is “better than tariffs.”

He believes that the reason why many countries have been able to maintain huge trade surpluses with the US for a long time is because the US allows this trade relationship to continue to exist. If the US stops trading with these countries, they will no longer enjoy their current economic advantages.

However, if implemented in the literal sense of Trump's statement, it would be an extremely aggressive trade policy.

The US currently has commodity trade deficits with dozens of countries, including many of its most important trading partners. As a result, a complete cessation of trade with countries with trade deficits could theoretically have a huge impact on the global supply chain, US imports, and international financial markets.

The White House has yet to further explain the specific meaning of Trump's “stop trade” and what kind of policy tools it may adopt.

Walsh has just released a signal to raise interest rates, but the White House continues to demand interest rate cuts

Trump's statement this time also means that the White House's public pressure on the Federal Reserve has clearly escalated once again. After Walsh succeeded Powell as chairman of the Federal Reserve, his public criticism of the Federal Reserve declined for a while.

But in the last week, the White House's demand for lower interest rates has rapidly intensified once again. Vice President Vance just publicly stated on Thursday that the Federal Reserve should lower interest rates, adding that according to recent US inflation data, cutting interest rates is an “appropriate and responsible” policy choice.

Vance placed particular emphasis on housing affordability issues. The average interest rate for 30-year fixed mortgages in the US has risen to 6.71%, the highest level in more than a year and is gradually approaching 7%. High financing costs continue to suppress demand for home purchases.

Now, just one day later, Trump has further escalated the pressure, not only demanding that the Federal Reserve cut interest rates, but also directly link this demand to US trade policy.

However, the policy signals recently released by Walsh clearly clash with the demands of the White House. At the annual meeting of global central banks in Jackson Hole last week, Walsh emphasized that the Fed must push inflation back to the 2% target, and said that short-term interest rates are the main tool to achieve the Fed's dual mission. The statement was widely interpreted by the market as if inflation does not cool down significantly, the Federal Reserve may need to raise interest rates further.

As the midterm elections approach, high interest rates and inflation become the focus of politics

Trump is putting renewed pressure on the Federal Reserve this time, when there are only about two months left in the US midterm elections. Continued high living costs have always been an important economic concern for voters, and high interest rates have further increased the cost of financing housing, automobiles, and other credit products.

This has caused the Trump administration to face a difficult policy contradiction. On the one hand, it hopes to ease the financing pressure on households and businesses by lowering interest rates. On the other hand, US inflation is still higher than the Federal Reserve's 2% target, and the latest employment data also shows that the economy and labor market are still quite resilient.

From the perspective of traditional monetary policy, strong employment data may instead give the Federal Reserve more time to maintain high interest rates, and even support further interest rate hikes when inflation accelerates again. As a result, Trump immediately called for “drastic interest rate cuts” after the release of strong non-farm payrolls data, further highlighting the contradiction between the White House's economic demands and the Federal Reserve's inflation target.

As the Federal Reserve's September 15-16 interest rate meeting approaches, the market will now focus on August inflation data. If inflation continues to be high, the interest rate hike signal previously released by Walsh may receive more support; if price pressure cools down significantly, the possibility that the Fed will keep interest rates unchanged may rise.