The more Trump pressures Powell, the harder it is to cut interest rates; currently, a rate cut by the Federal Reserve = a rate hike by the market?

Is the Federal Reserve's eagerness to cut interest rates counterproductive?

According to news from the Chasing Wind Trading Desk, Bank of America stated in a report on May 6 that the eagerly anticipated interest rate cuts by the Federal Reserve could be a double-edged sword. In the context of persistent inflationary pressures, new tariffs, and uncertain fiscal expansion prospects, an early rate cut may not only be ineffective but could also cause substantial harm to the real economy and deplete the Federal Reserve's valuable policy ammunition.

Not only unnecessary but potentially harmful

Powell has previously repeatedly asserted that the Federal Reserve is not in a hurry to cut interest rates. The April employment report proved that the Federal Reserve's patience is justified. Although the prevailing view is that, given the strong performance of the labor market, the necessity for the Federal Reserve to cut rates has diminished, Bank of America analysts believe that cutting rates at this stage may be counterproductive.

Bank of America analyst Aditya Bhave stated, The transmission of monetary policy to the real economy is achieved through borrowing rates, which primarily depend on long-term Treasury yields rather than policy rates. Recently, due to "de-dollarization" trades and concerns over fiscal deficits, the long-term U.S. Treasury market has performed poorly. So, does cutting rates really help lower the yields on 10-year and 30-year Treasuries?

Analysts emphasize, If the Federal Reserve cuts rates preemptively, it essentially presumes that the downward risks to economic growth from tariffs (and related uncertainties) and expected fiscal easing outweigh the upward risks to inflation. This is a risky judgment, and due to the Trump administration's calls for rate cuts, the market may perceive this preemptive easing as politically driven.

What if borrowing rates rise instead when the Federal Reserve cuts rates?

The market has already previewed the scenario of the Federal Reserve being forced to cut rates early. On April 21, amid heightened concerns that Powell might be replaced as Federal Reserve Chair (due to Trump's dissatisfaction with the lack of rate cuts), the U.S. stock, bond, and currency markets experienced a "triple kill," with significant declines in the stock market and the dollar, and a rise of over 10 basis points in the 30-year Treasury yield.

Bank of America believes that if the market perceives the Federal Reserve's rate cuts as politically motivated, a similar market reaction could occur again. Even if the 30-year Treasury yield remains stable throughout the rate-cutting cycle, this poses a problem for the Federal Reserve, as it means that it has consumed some of its policy tools. This is also another reason why the Federal Reserve will likely maintain interest rates for much longer than the market expects.This Wednesday, the Federal Reserve decided to pause interest rate cuts again, and Powell reiterated his stance of not rushing to act. Well-known financial journalist Nick Timiraos, known as the "new Federal Reserve correspondent," published a report stating that the Fed is facing a difficult choice, needing to decide whether to focus more on the risks of rising inflation or the risks of rising unemployment.

Timiraos pointed out that this puts the Federal Reserve in a position of greater uncertainty—cutting rates too early could lead to uncontrollable inflation expectations, while waiting too long could result in an economic recession.

Adam Posen, president of the Peterson Institute for International Economics, warned that cutting rates too quickly now increases the risk that the Federal Reserve will have to reverse its policy and raise rates in a few months. Last year, several allies of Trump criticized that the Federal Reserve's rapid rate cuts were stimulating more persistent inflation risks