Trump says Fed ‘boneheads’ should cut interest rates to zero ‘or less,’ US should refinance debt

President Donald Trump on Wednesday continued his verbal assault on the Federal Reserve, which he blames for slowing the economy, tweeting that the central bank should cut interest rates to zero or even set negative interest rates. The president also called Fed officials “boneheads” in the tweet.

“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,” he said.

A Fed spokesman declined comment on the latest Trump salvos.

The president also made a new suggestion not seen in some of his past attacks on the Fed, saying that the country should refinance its debt load. The U.S. has $22.5 trillion in debt, $16.7 trillion of which is held by the public.

That debt load has grown $2.6 trillion, or 13% under Trump, due in part to the 2017 tax cut that the president shepherded through Congress. Taxpayers have shelled out $538.6 billion in interest costs in the 2019 fiscal year, easily a record.

The idea for “refinancing” federal debt is without any modern precedent.

“It’s not viable and could be a significant problem for investors, financial markets and ultimately the economy,” said Mark Zandi, chief economist at Moody’s Analytics. “The debt is not prepayable. There’s a contractual relationship the Treasury has with investors. This isn’t a mortgage, this is U.S. Treasury debt. I think it would be incredibly disruptive to financial markets, and interest rates would ultimately rise, not fall.”

On Trump’s push for zero or negative rates, Zandi said he doesn’t see much benefit.

“The question you have to ask yourself is, if we go down to zero and we actually experienced a recession, then what?” he said.

‘It’s a bold idea’

It’s unclear how the refinancing idea would work. The Treasury Department likely would have to be involved, and there have been calls recently to issue longer-term debt, such as a 50- or 100-year Treasury.

“From a theoretical standpoint, obviously it would be wonderful for the United States government over a period of years if it were to lengthen the maturities on debt that would have rates below 1%,” said banking analyst Dick Bove at Odeon Capital Group. “It would certainly be beneficial to the United States government. Whether it would be beneficial to the United States economy is an open question.”

Cutting rates to zero or below would cheapen debt costs but also make the U.S. a less desirable spot for capital flow as the ability to generate yield would become more difficult.

The Fed is expected to approve another quarter-point rate cut at its meeting next week, following July’s reduction that was the first such move in 11 years. Markets foresee one more reduction before the end of the year and another in early 2020.

While central bank officials have said they would expect rates to go close to zero in the event of another recession, Fed Chairman Jerome Powell said Friday that he does not see a downturn on the horizon.

“If we ever went to negative interest rates, the money would stop coming into the United States and it would start flowing to wherever investors could find reasonable return that was positive,” Bove said. “That would slow the growth of the private sector. It’s definitely uncharted territory. It’s a bold idea. On balance, I think it would be harmful.”

Trump had made a suggestion during the 2016 presidential campaign that would have involved renegotiating the debt. That idea then was widely dismissed as a move the actually could drive Treasury yields higher, jeopardize the nation’s standing among its creditors and pose a threat to the U.S. dollar as the world’s reserve currency.

During a CNBC interview in May 2016, Trump said that if the economy turned south, he would try to get creditors to accept partial payment on U.S. debt.

“I would borrow, knowing that if the economy crashed, you could make a deal,” he said then.

His idea was that the U.S. would pay less than face value on the Treasury debt it issues to cover the burgeoning budget deficit. However, doing so would only increase the costs of issuing the debt as creditors would demand higher interest payments.

Trump has long bemoaned Fed policy, saying the central bank should get more in line with the near-zero rates employed by the nation’s global competitors. The Fed currently targets its benchmark overnight lending rate in a range between 2% and 2.25%, the highest of any G-7 nation.

In previous tweets, he has repeatedly ripped his own appointee, Powell, as being out of step with the economic needs in the U.S.

“The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of ‘Boneheads,’” Trump said in Wednesday’s tweets.

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