Trump’s “Rocket Fuel!” Economy Hits Headwinds as Borrowing Costs Soar
WASHINGTON (AP) — President Donald Trump’s insistent public campaign to slash interest rates and inject “Rocket Fuel!” into the U.S. economy is facing a stark and undeniable reality: borrowing costs are on the rise, directly contradicting his pledges and creating headwinds for American consumers and the federal government.
For months, President Trump has vociferously argued that the nation deserves the cheapest borrowing costs globally, a move he contended would supercharge growth and make key purchases like homes more affordable. Yet, despite this high-profile pressure on the Federal Reserve, the independent central bank, the financial landscape has shifted dramatically since the eruption of the war in Iran at the end of February.
The Unyielding Ascent of Borrowing Costs
The most immediate consequence for everyday Americans is the increasing expense of securing loans. Families looking to purchase homes or cars are finding mortgages and auto loans significantly pricier. This burden extends to the federal government itself, which has already allocated a staggering $827 billion this fiscal year to service the national debt — a sum that now surpasses its expenditures on national defense, underscoring the profound financial implications of rising rates.
The trajectory of interest rates has been unequivocally upward. Rates on 30-year U.S. Treasury bonds have climbed to their highest levels in nearly two decades, a direct repudiation of Trump’s promise to voters. More specifically, the interest rate on the benchmark 10-year U.S. Treasury note surged above 4.7% on Friday, eclipsing the rate the president inherited upon his return to the White House last year. This surge makes it more expensive for the government to borrow money and influences a wide array of other interest rates across the economy.
A New Fed Chair, Old Problems
The scope of this challenge was brought into sharp focus this past week during the second press conference of Kevin Warsh, the new Federal Reserve chair personally selected by President Trump. Warsh acknowledged that inflation continues to “run hot,” yet offered no clear guidance on immediate solutions. His tenure, which began in May, has seen him express a preference for allowing financial markets to play a more dominant role in setting rates, rather than relying solely on central bank interventions.
Political Fallout Ahead of Midterms
These escalating borrowing costs have become a significant concern for Republicans as they gear up for the November midterm elections. Paradoxically, some of President Trump’s own policies have inadvertently contributed to this rise.
For instance, his administration’s imposition of tariffs, which began last year, triggered such rapid rate increases that he was compelled to backtrack and reformulate them. Furthermore, the administration’s enthusiastic championing of data center construction for artificial intelligence projects has seen the bonds financing these ventures also contribute to the upward pressure on interest rates. And, crucially, the ongoing conflict in Iran has directly fueled a spike in global oil prices, which then translates into broader inflationary pressures across the economy.
While President Trump frequently highlights a low unemployment rate and robust consumer spending as indicators of a stable economy, these arguments appear to be failing to resonate with the public. Research released in June by Juan Felipe Riaño of Georgetown University and Francesco Trebbi of the University of California, Berkeley, suggests that voters are more concerned with whether their incomes are actually outpacing inflation. Over the last 12 months, inflation has nearly kept pace with hourly wage gains, and this doesn’t even account for the hidden burden of increased debt service costs on household budgets, which are not reflected in the consumer price index.
“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,” explained Riaño, underscoring the political vulnerability.
Housing Hopes Dwindle Amid Stagnant Rates
Housing affordability, a critical issue for many Americans, remains a significant pain point for voters. Earlier this year, the Trump administration attempted to mitigate rising mortgage rates by directing Freddie Mac and Fannie Mae, the government-controlled mortgage firms, to purchase at least $200 billion in home loans. Republicans had also hoped to campaign on falling rates and a bipartisan bill aimed at boosting home construction, with an eye on improving housing affordability and public sentiment if mortgage rates dipped below 6%.
However, President Trump dismissed the bipartisan housing bill as a “big yawn” and allowed it to become law without his signature. The latest data from Freddie Mac on Thursday revealed that 30-year mortgage rates were averaging 6.66%, essentially unchanged from a year ago, illustrating the persistent challenge in this sector.
Market Realities vs. Presidential Rhetoric
Fed Chair Warsh’s approach signifies a shift towards market-driven rate determination. “Markets reflect the higher inflation, policy uncertainty,” noted John Silvia, CEO of Dynamic Economic Strategy. “They are the product of events.” Warsh echoed this sentiment, stating, “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. This is, in my view, a change for the better — and we are just getting started.”
Looking Ahead: More Rate Hikes Expected
Time may be running short for President Trump to see the lower interest rates he desires. The next Federal Reserve meeting on rates is scheduled to conclude on September 16. Current market expectations, as tracked by CME FedWatch, indicate that Fed officials are likely to vote to raise rates further, a measure aimed at curbing persistent inflationary pressures. This trajectory suggests a continued uphill battle for the administration’s economic narrative as the midterms approach.
