The Fed Holds the Line: Powell’s Patience vs. Trump’s Push

Last week, the Federal Reserve (Fed), led by Chair Jerome Powell, announced its decision to keep the federal funds rate unchanged at 4.25–4.5%, marking the fourth consecutive meeting without a rate adjustment. Powell emphasized a cautious, data-driven approach, citing uncertainty over inflation, labor market trends, and the economic impact of President Donald Trump’s tariffs. Despite recent cooling in inflation, with core Personal Consumption Expenditures (PCE) at 2.5% in April, the Fed remains wary of persistent price pressures and is in no rush to cut rates, projecting only two potential reductions in 2025.  

Trump, however, sharply criticized Powell, branding him “Mr. Too Late” and a “numbskull” for not slashing rates. In posts on Truth Social, Trump argued that a 2% cut in the federal funds rate (to 2.25–2.5%) would save the government $600 billion annually in debt servicing costs, claiming the economy is thriving despite Powell’s inaction. Powell, of course, rebuffed Trump’s pressure, stressing the Fed’s independence and a focus on its dual mandate of price stability and maximum employment. He noted that tariffs could fuel inflation, complicating rate cuts (however, market-implied inflation expectations remain anchored and don’t foretell much higher inflation going forward).  

But while a lower rate could reduce interest on short-term Treasury bills (T-bill) and floating-rate notes (roughly 25% of the $28 trillion publicly held debt), most federal debt is locked in longer-term securities at fixed yields. That said, nearly $6 trillion of T-bill securities will need to be refinanced this year at or near the fed funds rate. So, a reduction in the fed funds rate would have a meaningful impact on U.S. debt service charges, but not perhaps to the degree that Trump suggested.  

While T-bills don’t have an interest rate, per se, they are issued at a discount to par (the discount reflects the effective yield), and the current effective yield is around 4.3%. So, by reducing the fed funds rate by 2%, the effective rate would likely fall to around 2.3%. Given the current T-bill composition, the likely savings would be in the range of $125 billion to $150 billion, not chump change, especially with deficits as large as they are, but shy of the $600 billion noted above. Moreover, market pricing suggests it would likely take an economic contraction or worse to get the fed funds rate much lower than 3.5%, which is what markets have priced in as the trough of the fed funds rate.

Too Late Powell?  

Nearly $6 trillion will need to be refinanced this year at/around the fed funds rate

Source: LPL Research, Bloomberg 06/24/25
Disclosures: Past performance is no guarantee of future results.

As for the coupon paying securities, which represent the lion’s share of Treasury issuance, the weighted average coupon for those securities is just under 2.9%. So, to get an actual reduction in debt service expenses for this $22 trillion, the U.S. Treasury yield curve would need to trade under 3%, which isn’t something we expect absent an economic contraction (which isn’t our base case). We think the Fed will cut rates this year and maybe a few times in 2026, but to get a meaningful reduction in U.S. interest expenses, the Fed would likely need to revisit the zero interest rate policies of the pre-COVID-19 years, which is unlikely to happen anytime soon, in our view.