Trump’s Promise of Economic ‘Rocket Fuel’ Faces Interest Rates Rise/ TezzBuzz/ WASHINGTON/ J. Mansour/ President Donald Trump’s campaign for lower interest rates is faltering as Treasury yields, mortgage rates and government borrowing costs continue to rise. Inflation, tariffs, artificial-intelligence investment and the Iran war have complicated the Federal Reserve’s path toward reducing rates. Higher borrowing costs and stagnant housing affordability could become major political vulnerabilities for Republicans in November’s midterm elections
Quick Look
- Trump has repeatedly pressed the Federal Reserve to cut its benchmark interest rate.
- He said lower rates would provide “Rocket Fuel!” for economic growth.
- The 10-year Treasury yield climbed above 4.7% Friday.
- Rates on 30-year Treasury bonds reached their highest levels in nearly two decades.
- The government has spent $827 billion servicing the national debt this fiscal year.
- Second-quarter economic growth slowed to an annualized 1.5%.
- Average 30-year mortgage rates stood at 6.66%.
- The Fed has kept its benchmark rate unchanged this year.
- Inflation has nearly matched hourly wage growth over the past 12 months.
- Trump’s tariffs, AI data-center development and the Iran war have contributed to higher borrowing costs.
- Financial markets currently expect the Fed to raise rates at its September meeting.
- The next Fed policy decision is scheduled for Sept. 16.
Deep Look
Trump’s campaign for lower interest rates loses ground
WASHINGTON — President Donald Trump has spent months demanding lower interest rates, arguing that the United States should have some of the cheapest borrowing costs in the world.
Instead, rates have moved in the opposite direction.
Trump has repeatedly pressured the Federal Reserve to slash its benchmark rate, claiming that cheaper credit would provide “Rocket Fuel!” for the economy and make homes, vehicles and other major purchases more affordable.
Since the war with Iran began at the end of February, however, borrowing costs have increased. The rise has made mortgages and auto loans more expensive while increasing the federal government’s cost of financing the national debt.
The government has spent $827 billion on debt service so far during the current fiscal year — more than it has spent on national defense.
Fed chair offers no clear path toward lower rates
The challenge became more apparent after Federal Reserve Chair Kevin Warsh held his second news conference since taking over the central bank.
Warsh, whom Trump selected to lead the Fed, acknowledged that inflation remains elevated but offered little guidance about how policymakers intend to bring it under control.
The Fed has kept its benchmark interest rate unchanged this year. Meanwhile, rates determined by financial markets have continued climbing as investors demand greater returns for holding U.S. government debt.
Rates on 30-year Treasury bonds reached their highest levels in nearly 20 years.
The yield on the benchmark 10-year Treasury note climbed above 4.7% Friday, exceeding the level Trump inherited when he returned to the White House in 2025.
Trump portrays economy as historically successful
Despite the rise in borrowing costs, Trump has continued describing the economy as exceptionally strong.
“We have the most successful environment that we’ve ever had,” Trump told Cabinet officials Friday. “There’s never been anything like it from the standpoint of investment into our country.”
Neither Trump nor Treasury Secretary Scott Bessent discussed interest rates during the public portion of the Cabinet meeting.
Recent government data showed that the economy expanded at a sluggish annual rate of 1.5% during the second quarter.
The president can still point to low unemployment, resilient consumer spending and major investment commitments as evidence that the economy remains stable. Those indicators, however, have not eliminated public concerns about inflation and affordability.
White House links lower rates to ending Iran war
White House spokesperson Kush Desai argued that resolving the war with Iran would reduce oil prices, ease inflation and create conditions for the Federal Reserve to lower rates.
“Oil prices — and thus overall inflation — will plummet again when President Trump forces a successful resolution with Iran, further paving the way for additional interest rate cuts by the Federal Reserve,” Desai said.
The Iran conflict has disrupted energy markets and contributed to higher oil and gasoline prices.
Higher energy costs can spread throughout the economy because businesses pay more for transportation, electricity, manufacturing and raw materials. Those expenses can ultimately reach consumers through higher prices.
Persistent inflation makes it harder for the Fed to reduce its benchmark rate without risking another acceleration in price increases.
Trump policies contribute to rising borrowing costs
Several of Trump’s policies have played a role in pushing borrowing costs higher.
His tariffs caused rates to rise so quickly last year that the president backed away from some measures and introduced revised versions.
Trump has also promoted rapid construction of data centers needed to support artificial intelligence. Bonds issued to finance those projects appear to have added pressure to interest rates as investors absorb increased borrowing.
The war with Iran has created another source of inflation by driving energy prices higher.
Financial markets account for those risks by demanding higher yields on Treasury debt and other bonds.
Higher rates create midterm risks for Republicans
Rising borrowing costs could become a political liability for Republicans ahead of the November midterm elections.
Party leaders had hoped to demonstrate clear improvements in affordability before voters decided control of Congress. Instead, consumers continue confronting high mortgage rates, increased financing costs and prices that remain significantly above pre-pandemic levels.
Trump and Republican candidates promised lower interest rates during the 2024 election. They also suggested that some consumer prices could decline outright under their policies.
Over the past 12 months, however, inflation has nearly matched growth in hourly wages.
That comparison may understate the financial pressure on households because the consumer price index does not include the cost of servicing debt.
Voters focus on whether wages exceed inflation
Research published in June by Georgetown University economist Juan Felipe Riaño and Francesco Trebbi of the University of California, Berkeley, suggested that voters focus heavily on whether their incomes are increasing faster than prices.
When wages fail to outpace inflation and borrowing expenses, voters may conclude that their personal financial situation is deteriorating even when unemployment remains low or the economy continues growing.
“It cut against Democrats in 2024, and if prices and borrowing costs keep outrunning wages into the fall, the same logic points at Republicans now,” Riaño told the AP.
That dynamic could make inflation and interest rates especially important in competitive House and Senate races.
Housing affordability remains a major challenge
Housing has been one of the clearest examples of the affordability problem confronting the administration.
Earlier this year, the Trump administration directed government-controlled mortgage companies Freddie Mac and Fannie Mae to purchase at least $200 billion in home loans. The move was intended to reduce mortgage rates by increasing demand for mortgage-backed debt.
Republicans had hoped to campaign on a combination of falling mortgage rates and bipartisan legislation designed to encourage additional home construction.
One Republican lawmaker, speaking anonymously about campaign strategy, said party officials had hoped Trump could sign the housing bill as mortgage rates fell below 6%.
That combination could have improved affordability and strengthened public confidence in the economy before the midterms.
Instead, Trump dismissed the measure as a “big yawn” and allowed it to become law without his signature.
Freddie Mac reported Thursday that the average rate on a 30-year mortgage was 6.66%, roughly unchanged from one year earlier.
Financial markets exert greater influence over rates
Warsh has indicated that he is comfortable allowing financial markets to play a larger role in determining borrowing costs.
Although the Fed directly controls a short-term benchmark rate, investors determine yields on longer-term Treasury securities based on their expectations for inflation, government borrowing and economic growth.
“Markets reflect the higher inflation, policy uncertainty,” said John Silvia, CEO of Dynamic Economic Strategy. “They are the product of events.”
Investors have demanded a higher premium for owning U.S. government debt even while the central bank has left its benchmark rate unchanged.
The resulting increase in Treasury yields affects mortgages, business loans, credit markets and other borrowing costs throughout the economy.
Warsh welcomes market-driven interest rates
Warsh described the market’s growing influence as a positive development, even though it has produced an outcome contrary to Trump’s demands for cheaper borrowing.
“Market participants are learning to play the ball, not the referee — and market prices will continue to respond in the direction and magnitude they see fit,” Warsh said. “This is, in my view, a change for the better — and we are just getting started.”
The comments suggested that the Fed chair may be reluctant to intervene simply because market rates are moving higher.
They also highlighted a potential divide between Trump’s preference for rapid rate reductions and the central bank’s focus on controlling inflation.
Markets anticipate possible September rate increase
Time is running short for Trump to secure lower borrowing costs before the midterm elections.
The Federal Reserve’s next policy meeting will conclude Sept. 16, less than two months before Election Day.
Rather than expecting a rate cut, financial markets currently predict that Fed officials will raise rates to combat persistent inflation, according to CME FedWatch.
Such a move would further undermine Trump’s promise that borrowing costs would fall and could add pressure to mortgages, government debt expenses and Republican economic messaging during the final weeks of the midterm campaign.
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