[New York Diary] "Deficit Bomb" Tax Cut Plan... Trump's Solution to the Debt Crisis Is "Rate Cuts"

"We are spending $600 billion every year just sitting here, paying interest on Treasury bonds, all because of one fool who refuses to cut rates."

This was a public statement by former U.S. President Donald Trump, directly pressuring Jerome Powell, the Chair of the Federal Reserve, to lower interest rates. Trump, who has consistently called for rate cuts since before taking office, has recently begun to highlight the burden of interest payments on Treasury bonds as his main justification. As the federal government's massive debt and resulting interest expenses continue to balloon, Trump's push to resolve the issue through rate cuts has become increasingly explicit.

As of the 2024 fiscal year, the U.S. federal government's annual interest expenditure stands at $949 billion. This accounts for 14% of the total budget and even surpasses the defense budget, which is $826 billion. Trump argues, "We need to cut rates by 2.5 percentage points to save billions in interest payments caused by Biden's short-term debt." It is true that the previous Joe Biden administration increased the issuance of short-term bonds with maturities of less than one year to take advantage of the low-interest-rate environment in the aftermath of the COVID-19 pandemic. This borrowing structure, combined with the Fed's shift to higher rates, has exacerbated the Treasury's interest burden.

However, Trump's persistent calls for rate cuts are not solely aimed at reducing interest on existing debt. His push is also closely tied to the large-scale tax cut bill he signed into law on July 4, Independence Day-a bill that encapsulates his core policy agenda and is often referred to as the "big, beautiful bill." This legislation includes income and corporate tax cuts, tax exemptions for tips and overtime pay, and expanded border security funding, all of which are expected to significantly increase the fiscal deficit. According to the Congressional Budget Office (CBO), the bill is projected to add $3.3 trillion to the federal deficit by 2034. As tax revenues decline, issuing more Treasury bonds to cover the deficit becomes inevitable, and if high interest rates persist, the resulting interest burden could become unsustainable. Ultimately, Trump's relentless demand for rate cuts is not just about economic management-it is a political necessity for fulfilling his tax cut promises.

For now, the Treasury market remains calm. Some observers even suggest that the bond market has effectively given its approval to the tax cut plan. However, the risk of a sharp spike in Treasury yields has not been completely eliminated. If distrust in fiscal or monetary policy grows, the so-called "bond vigilantes" could return at any moment, selling off Treasuries in protest. In particular, if Trump continues to undermine the independence of monetary policy by openly demanding rate cuts to address the debt crisis, the market could quickly present the U.S. government with a hefty bill. This could trigger a capital exodus from U.S. assets-such as the dollar and Treasuries-driven by long-term concerns about the U.S. economy.

Trump has been escalating his pressure on Powell, repeatedly calling him an "idiot" and suggesting that he has narrowed down Powell's possible successors to about three candidates, seemingly in an attempt to hasten Powell's lame-duck status ahead of his term ending in May next year. This sustained pressure is gradually influencing sentiment within the Fed. Christopher Waller, a current Fed Governor and a potential candidate for the next Chair, as well as Michelle Bowman, who was recently appointed Vice Chair by Trump, have both begun to mention the possibility of a rate cut in July. Both were previously considered hawkish members within the Fed.

In early April, after the announcement of reciprocal tariffs led to a sell-off of U.S. Treasuries, Trump quickly retreated from his aggressive trade policy by suspending the tariffs for 90 days. This time, he has again extended the suspension period, which was set to end on July 8, to August 1. When irrational policies or political motives disrupt the economy, the market will inevitably demand a price. The rate cut card Trump has played to escape the debt trap threatens the independence of monetary authorities and could push the U.S. economy into a deep quagmire.