President Trump has recognized the problem big time, and in fact, his crusade to push the Fed to lower rates is only secondary to boosting growth. His main rationale: Avoid the interest rate dragon that threatens to undermine America’s position as the safest place in the world to invest. In a Truth Social post following the Fed’s decision to leave its benchmark rate unchanged on January 29, the POTUS stated, “The US should be paying LOWER INTEREST RATES THAN ANY COUNTRY IN THE WORLD!…

“Debt interest costs are the big fight between the Fed and the administration,” John Cochrane, a prominent economist at Stanford’s Hoover Institution, said. luck. “If you’re the fire department, and someone else is pouring fuel on the fire (meaning through a fiscal policy of massive deficits) you’re going to have a hard time putting it out.” He noted that if the central bank settles on raising rates to combat our current tight inflation that is running above its 2% target—or even to leave the benchmark where it currently sits—this administration will push hard. “This is the position any administration can take,” he added, “and it’s the issue we’ve been dealing with since World War II. Going forward under Warsh or any other chairman, it’s going to be very difficult for the Fed to raise rates, or even leave them at current levels.”

Here is the confusion. If the Fed lowers rates as Trump has demanded, the budget picture will improve in the short term. That’s because the central bank has power over the yields on T-bills, instruments that mature in a year or less, and short-term maturities in the US in general. The Treasury is already relying heavily on T-bills to refinance maturing bonds and raise fresh cash to fund a huge shortfall between revenues and expenditures that will hit $1.78 trillion in FY 2025. Last fiscal year, T-bills accounted for a staggering 84% of all federal borrowing. And in the next twelve months, no less than $10 trillion in US bonds will come due, and if the practice of the Treasury continues as expected, these super-short-term securities will be replaced as well. in all probability. most fund the deficit in FY 2026 at last year’s mark or greater.

By lowering the yields of T-bills and other shorter-dated Treasuries, and making them a greater part of all issuance, the US can slow down the increase in interest costs compared to where it would be if the country refinanced the maturing bonds and financed the deficits mainly using 5, 10 years and even longer maturities, the previous practice that prevailed. But the go-short approach poses great risks. It’s like getting the kind of “teaser rate” mortgages that eventually gobbled up homeowners during the 2007 housing meltdown.

Why? Because cutting rates when inflation is still high can stimulate more inflation, it means the US will have to refinance cheap borrowing at a much higher cost. A rapid rise in the CPI lifted yields on 10-year and other longer-term Fed bonds not control, but the market is. The Treasury cannot bet on short-term rates indefinitely. It will eventually have to choose safety, lock in costs and extend the maturity profile of US debt. If that happens, the interest rate picture will be worse than if the Fed had not lowered its benchmark rate in the first place—through its failure to make the difficult choice that combating inflation comes first.

In the second scenario, Warsh proved a staunch inflation fighter, and took the position that it is not the Fed’s job to worry about the fiscal picture. Setting spending and spending is the responsibility of the president and Congress. The result will be high rates on even relatively short-term Treasuries, at today’s numbers or more, for a long time to come. And all forecasts, including CBO’s, conclude that such an outcome leads to unsustainable debts, deficits, and especially rising interest costs that leave less and less money to fund our rapidly growing obligations for the likes of Social Security, Medicare and Medicaid.

“Then, the dollar continues to weaken and foreign investors lose confidence in America’s fiscal future,” said Steve Hanke, a distinguished professor at Johns Hopkins University. “This country has lost its ‘excessive privilege’ of being able to borrow from abroad at reasonable rates to finance our deficits.” Result: Those foreign investors demand higher rates to compensate for the increased uncertainty of holding Treasuries, as well as our corporate bonds and real estate. The ramping interest costs that fueled the problem eventually turned into an explosion of carrying costs, resulting in a full-blown crisis.

In the long run, where all these heads are not so different is if Warsh takes a different tack and follows the Trump formula by slashing the Fed Funds rate — because that would raise the 10-year yield, and eventually increase interest costs as the Treasury stops hiding our financial situation by borrowing more short-term.

Few are talking about debt and disabilities as Kevin Warsh’s biggest problem on his hands. But the President got it. In his Truth Social post where he criticized Powell, Trump highlighted the issue. Unfortunately, his “ticket clipping” solution was only temporary. For Warsh, the best long-term solution is to fight inflation at all costs, as part of the Fed’s mandate. But you can be sure that he will, like Powell, be a prime target of the ire of the president who just anointed him.