(Bloomberg) — As President Donald Trump lashes out at government agencies across Washington, one of his favorite first-term targets – the Federal Reserve – has been getting a relatively easy ride.
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Things could of course change at any moment. And it’s true that since returning to the White House Trump has called for lower interest rates, criticized the Fed for failing to get a grip on inflation and opined that it’s not much good at regulation. But that’s mild stuff from a president who once called US central bankers “boneheads.”
Notably, Trump described the January decision to hold rates steady – which looks set to be the Fed’s stance for some time — as “the right thing to do.” He hasn’t reprised a first-term wish to sack Chair Jerome Powell. Even an executive order to bring independent agencies to heel carved out an exception for monetary policy. Treasury Secretary Scott Bessent wants to focus on bringing down long-term interest rates, not the overnight ones set by the Fed — and Trump appears to be going along.
The truce is welcome news for investors worried that Trump might erode the autonomy of the world’s most powerful central bank, and thus undermine faith in US markets. It’s also out of step with the new administration’s wrecking-ball approach in so many other areas, from the public sector at home to longstanding alliances abroad.
Market-watchers have two broad explanations. One is that Bessent and other aides like Kevin Hassett — director of the White House National Economic Council — have been a calming influence, persuading Trump to stay out of the Fed’s rates lane and focus on policies closer to the executive branch’s traditional purview.
Bessent has been among the most vocal administration officials arguing that lower spending and taxes, aggressive use of tariffs and ramped-up energy production will combine to spur growth, trim budget deficits and lower inflation. This will keep borrowing costs down for businesses and households, they say – pointing to 10-year Treasury yields rather than the Fed’s policy rate as the gauge of success.
“Bessent may be having some influence on his boss in terms of focusing on longer-term rates,” Evercore ISI’s Krishna Guha wrote in a note to clients. “In the near term at least this eases tension between the Fed and the new administration,” and helps put downward pressure on yields.
Recent bond-market history offers some support for the Bessent case. When the Fed was lowering rates in the final months of 2024, starting with a 50-basis-point move, 10-year Treasury yields headed in the opposite direction.
Those are the rates with most impact on real-economy borrowing costs – from home mortgages and auto loans to corporate credit – so the episode undermined the idea that there’s a simple fix to be had from jawboning the Fed.
Still, expectations for Fed policy remain the biggest determinant of Treasury rates, if not the only one. A rally this month has pushed 10-year yields down toward 4.2%, more than half a percentage point below their January high. Traders say it’s driven by bets that the Fed will pivot to worrying about an economic slowdown. Data published Friday, showing the sharpest drop in consumer spending for almost four years, may add to that concern.
What’s more, many analysts doubt that Trump and Bessent’s economic program is really as conducive to cheaper borrowing as they claim.
The administration’s policies “won’t lower the 10-year yield,” says Win Thin, global head of markets strategy at Brown Brothers Harriman. “Tariffs are inflationary, there’s no two ways about it,” he says. And with a GOP-led Congress working on tax cuts, “we’re looking at fiscal stimulus coming down the pipeline. It’s inflationary because we’re already at full employment.”
The other theory to explain Trump’s relative reticence is that demanding cheap money comes with higher political risks now, and makes less economic sense. The backdrop has changed drastically since his first term, when high US inflation was a distant memory. Americans got stung by the post-pandemic surge in consumer prices, and Trump won the election on a pledge to rein them in.
“Right now it’s an easy time to be hands-off on the Fed because inflation’s high, the labor market’s strong, the economy’s solid and markets are buoyant,” says Matthew Luzzetti, chief US economist at Deutsche Bank.
The picture could change if employment weakens while inflation remains above-target, and there are warning signs on both fronts. “That could potentially return the Trump administration to being critical of the Fed,” Luzzetti says.
Bessent, in contrast to Trump, has explicitly said he won’t comment on monetary policy. “We are not focused on whether the Fed is going to cut, not cut,” he told Bloomberg on Feb. 5. “The 10-year, I believe, is the important price to focus on. It’s mortgages. It’s long-term capital formation.”
The Treasury chief has been lobbying his boss on the topic since joining Trump’s election bandwagon last year. Behind closed doors and between campaign stops, he led efforts to convey to Trump that telegraphing stability around his concerns about the Fed was in his best interests, according to people familiar with the matter.
Bessent was able to persuade Trump that immediately attempting to fire Powell would trigger a market and constitutional crisis that wasn’t worth the effort, according to the people. His case went like this: Powell’s term would end in mid-2026, leaving plenty of time for Trump to shape the central bank, and a big fight over Fed independence could deter high-caliber candidates from taking the job.
In June, Trump publicly stated that he’d let Powell serve out his term, a pledge he repeated after winning the election. Bessent and Powell this month began holding weekly meetings, a longstanding tradition between the two institutions. The Treasury Department didn’t respond to a request for comment.
‘The Ultimate Check’
Outside of its core rate-setting task, there are signs that the Fed is shifting under Trump pressure – for example, by yielding on its regulatory work. It could be an effort to keep the central bank’s powder dry in case a fight over monetary policy independence blows up.
Michael Barr, a Democrat, announced last month he would step down as vice chair for supervision at the end of February, amid speculation Republicans would seek to remove him. Barr acknowledged the political tensions surrounding the role in his resignation letter. In a speech this week he said monetary policy and financial stability are “inextricably linked.”
Just before Inauguration Day, the Fed withdrew from a global coalition for studying climate risk. GOP lawmakers have pressured Powell on the topic, arguing that climate issues gained undue influence over financial regulation. Powell said the withdrawal was not driven by politics and reflected a disconnect between the group’s work and the Fed’s mandate.
Powell has expressed confidence that he can work well with the Trump administration. He’s been careful to reiterate that the Fed will stay out of partisan politics, and largely refrained from commenting on how Trump’s economic agenda might impact the path of interest rates.
Even if the truce starts to fray, there’s one crucial factor – besides the instincts of his top economic aides – that could restrain Trump from pressing too hard, according to Mark Spindel, chief investment officer at Potomac River Capital. He’s talking about financial markets, which Trump tends to treat as a scorecard.
“If markets get a whiff that policy is compromised, or there’s the wrong policy in place, or the president is really barging into the Eccles building to demand a seat at the FOMC, markets could respond very negatively,” Spindel says. “That could provide the ultimate check.”
(Updates with new economic data, bond yields in 10th paragraph.)
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