Trump Wants a Fed Rate Cut Decision Tomorrow - Here's Why That Could Cost Consumers

President Trump is pressuring the Federal Reserve to cut interest rates, a move that might help Americans keep more cash in their pocket. Ahead of the Fed's September meeting on Wednesday, Trump is turning up the public pressure, knowing that the Fed's decision might have significant economic impacts.

Here's what you should know about tomorrow's meeting and what the Fed's decision might mean for inflation, borrowed money, and your finances.

The tension of Trump's argument

Trump and senior officials are pressuring the Fed to not only hold interest rates steady, but even to cut those rates. The Fed tries to maintain inflation at 2%, using its control of the benchmark interest rate to help regulate inflation.

However, inflation has been well above that target 2% all year, and some investors are projecting that the Fed may increase the interest rate during the September meeting in an effort to slow inflation. Markets are split, and some traders are pricing in the possibility of a hold.

What cutting rates too soon might do

Trump has strongly pressed the Fed for lower interest rates, arguing that the U.S. should have the lowest interest rates. But Mark Higgins, senior vice president at Index Fund Advisors, argues that reducing rates too early might be a poor choice given the current inflation rates.

"History demonstrates that the most reliable way to restore price stability is to maintain sufficiently restrictive monetary policy until inflation is decisively tamed," explained Higgins. "Considering the duration of this inflationary episode, I believe sending a clear message via an interest rate hike is appropriate and in the best interest of the American people.

Cutting rates too soon might erode consumers' faith in the Fed's ability to regulate inflation and create a stable economy. Those expectations might lead to increased inflation that's even more difficult for the Fed to control.

What an interest rate cut might mean

Fed interest rate cuts are closely tied to borrowing costs on loans and credit cards. If the Fed were to cut rates, individuals with a fixed-rate mortgage would still see the same rate, but might be able to refinance at a lower rate. Those with adjustable-rate mortgages could potentially see lower interest rates by their next adjustment period. Auto loan rates also typically fall when the Fed cuts rates, and credit cards with variable annual percentage rates also fall as the Fed's interest rate decreases.

Though individuals with debt might save on interest, savers who have funds in high-yield savings accounts may earn less in interest on their money when the Fed cuts rates.

Cutting rates may stimulate economic activity, but it may also increase inflation.

What an interest rate hold might mean

If the Fed maintains the interest rate, consumers might not see a quick change in borrowing costs or the interest they earn on their savings.

The Fed maintained the rate during its July meeting, choosing to hold rates steady. During the meeting, Fed Chair Kevin Warsh indicated that tighter financial conditions prompted the hold, and that market interest rates had risen and increased borrowing costs, which might help slow demand and inflation.

What an interest rate increase might mean

It's possible that the Fed might increase the interest rate to help slow inflation. A higher interest rate translates to higher borrowing rates, making it more expensive to take out auto loans, personal loans, business loans, and more. Credit card interest rates increase, too, so consumers might pay more to borrow money. Increasing the cost of borrowing money may discourage some consumers from making certain purchases, slowing down inflation.

Those higher interest rates could be good news for savers, though. Interest rates on savings accounts might increase, so savers could potentially earn more money on the money that they've saved.

What might happen to mortgage rates

Fed rate hikes and cuts may affect mortgages to a point, but the factor that most drives mortgage interest rates is inflation. Shorter-term consumer debt interest rates tend to follow the prime rate, which is closely tied to the Fed rate. Longer-term rates, such as mortgage rates, are more affected by inflation expectations.

In other words, if the Fed cuts interest rates too early and inflation continues to grow, mortgage rates might also increase. That "consumer-friendly" rate cut might end up harming consumers more than it helps.

Bottom line

On Wednesday, pay close attention not only to the decision the Fed makes, but also to Chair Warsh's guidance and his tone during the press conference. The dot plot also provides an idea of how Fed members believe interest rates may change over the next few years. The August Consumer Price Index is released prior to the meeting and shapes the Fed's thinking about the economy, possibly affecting their decision-making during the meeting.

The Fed has a job of carefully balancing the interest rate, inflation, and what's best for American consumers. A lower rate might eliminate some money stress for Americans who need to borrow money, but it could also have negative impacts, so we'll have to wait and see what the Fed decides is the right choice at this time.

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