President Trump is continuing to press the Federal Reserve for major rate cuts, recently demanding that rates be lowered to match the European Central Bank (ECB).
While the Administration may want more aggressive easing, the Federal Open Markets Committee (FOMC) appears much more cautious. Even its two most dovish members are projecting just three 25 basis point cuts this year. That would bring the federal funds target to 3.50 – 3.75 per cent, which is still well above the ECB’s main refinancing rate of 2 per cent.
Despite the President’s assertions, cutting rates will not help homeowners. Mortgage rates are priced off bond yields, not the federal funds rate. In fact, reigniting inflation would be far more damaging for homebuyers. Fiscal policy – specifically the federal budget – is likely to have a greater impact on mortgage rates going forward.
Pressure on the Fed is unsettling for markets, but it would be much worse if the Fed were to give in. Some in the press have suggested the muted market response to this pressure reflects a belief that the President is bluffing. More likely, it reflects market confidence in the continued independence of the broader FOMC.
US Treasury Secretary Scott Bessent recently questioned the Federal Reserve’s effectiveness, calling for a sweeping review of the institution and its role. He specifically criticized what he called “fear-mongering over tariffs,” pointing to the limited inflationary impact to date as evidence.
So far, trade war costs have been lower than initial estimates. A key reason appears to be that businesses built up inventories ahead of the tariffs, meaning many imported goods sold during the first half of 2025 were not subject to these new duties. However, this comparatively low-cost situation will change. As companies sell off pre-tariff stock, a larger share of goods sold during the second half of the year will be subject to Trump’s tariffs. The threatened rates are also significantly higher than those currently in effect.
It’s not reasonable to fault the Fed for being unable to forecast every shift in the Administration’s tariffs policies. Still, mounting evidence suggests that, over the longer term, consumers will bear a growing share of tariff costs. Import price data from the Bureau of Labor Statistics – based on pre-tariff prices – shows a modest increase in recent non-fuel import prices. If foreign exporters were absorbing the tariffs, those prices would be declining. Meanwhile, the US dollar has fallen by roughly 10 per cent in 2025, weakening the argument that a rising dollar could offset tariff impacts.
Although some evidence suggests US companies have temporarily eaten tariff costs, recent corporate surveys and earnings calls indicate most companies plan to pass costs on to consumers over the medium to long term.
My concern is not what the Fed will do, but how the Treasury will manage the debt. Regular and predictable debt management saves the government money. The Bank of Canada and Department of Finance learned this when managing the federal debt in the 1980s and 1990s. A consistent debt issuance pattern helps build investor confidence and minimizes overall borrowing costs.
Currently, the US Treasury appears to be treating its debt program more like a hedge fund, effectively betting on future interest rates in the hopes of reducing debt-service costs.
In January, the Congressional Budget Office (CBO) projected that ongoing federal deficits would add nearly $22 trillion to the national debt over the next decade. This would push net interest payments from 3.2 percent of GDP in 2025 to 4.1 percent in 2035. Since then, the fiscal outlook has deteriorated: interest rates have risen above the CBO’s assumptions, and the budget is now expected to add another $3 trillion to the deficit.
Reducing spending or increasing tax revenue would help lower the debt and borrowing costs. In theory, this would mean tighter fiscal policy, which could be offset through lower interest rates. This isn’t going to happen, so the magic bullet is a shift in the debt issuance strategy: selling a greater share of shorter-dated securities.
How this is implemented will be critical. A gradual, deliberate and careful transition to a lower average maturity of federal debt could be accepted by investors. But if this move is seen as a tactical opportunity in response to yield curve fluctuations, it’s likely to be met with resistance by the market. A shorter-term issuance strategy faces greater rollover risk, which increases the potential for investor pushback.
We’ll get a clearer sense of how the market views the Treasury’s approach to its debt issuance strategy when the quarterly refunding plan is released on July 30.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Ottawa introduced the Housing Accelerator Fund (HAF) in 2023 and broke with tradition by negotiating directly with municipalities instead of provinces. It may have looked good politically, but it overlooked the lack of infrastructure to support those relationships.
Toronto’s recent vote against citywide sixplexes—a key condition of its HAF deal—exposes the cracks: no governance framework, no enforcement tools, and no fallback when local politics take over.
Is it time for Ottawa to bring provinces and territories back to the table?
Our latest Housing Affordability Watch explains what’s happening—and why it matters. Read it here: A HAF-Baked Plan
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
