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What if the Fed cut rates to just 1% like Trump wants? An analyst says it''s ''ludicrous'' and may scare businesses

Fed's Potential 1% Rate Cuts: Navigating Trump-Era Inflation, Treasury Yields, and Economic Ripples on Capex

In a landscape increasingly shaped by political shifts and economic uncertainties, the Federal Reserve's anticipated interest rate cuts are poised to play a pivotal role in steering the U.S. economy through turbulent waters. As whispers of a 1% cumulative reduction in the federal funds rate gain traction among economists and market watchers, the interplay with a potential return of Donald Trump's policies adds layers of complexity. This move, expected to unfold over the coming quarters, could temper inflation while influencing treasury yields, overall economic growth, and corporate capital expenditures (capex). But as history has shown, such monetary maneuvers are double-edged swords, capable of fueling recovery or stoking unintended inflationary fires.

The Federal Reserve, under Chair Jerome Powell, has been signaling a pivot from its aggressive rate-hiking stance that began in 2022 to combat post-pandemic inflation. With inflation now hovering around 3%—down from peaks above 9%—the Fed's dot plot projections suggest a series of cuts that could total 100 basis points by mid-2026. This isn't a single slash but a gradual easing, potentially starting with a 25-basis-point trim as early as September 2025, followed by incremental adjustments. The rationale is clear: to prevent a recession amid softening labor markets and cooling consumer spending. Unemployment has ticked up to 4.1%, and GDP growth, while resilient at 2.5% annualized in the latest quarter, shows signs of deceleration. By lowering borrowing costs, the Fed aims to stimulate investment and consumption without reigniting the inflationary beast.

Enter the Trump factor. If former President Donald Trump secures a second term in the 2024 election—a scenario that's looking increasingly plausible based on recent polls—his proposed policies could dramatically alter this calculus. Trump's agenda includes sweeping tariffs on imports, particularly from China, which could drive up costs for goods and exacerbate inflation. Economists at institutions like Goldman Sachs estimate that a 10% universal tariff could add 1-2 percentage points to core inflation, forcing the Fed to reconsider the depth and speed of its cuts. Moreover, Trump's tax cut extensions and deregulation push might boost short-term growth but widen fiscal deficits, putting upward pressure on long-term interest rates. This is where treasury yields come into sharp focus.

Treasury yields, the benchmark for everything from mortgages to corporate bonds, have been volatile. The 10-year Treasury yield recently dipped below 4% amid rate-cut expectations, a stark contrast to its 5% peak in late 2023. A 1% Fed cut could further suppress yields, potentially dropping the 10-year to around 3.5% or lower, according to futures markets. This would be a boon for borrowers, reducing the cost of home loans and encouraging refinancing booms. However, in a Trump-influenced environment, inflationary pressures from tariffs and fiscal expansion could counteract this, leading to a "higher for longer" yield curve. Bond investors are already pricing in this risk, with the yield curve inverting less dramatically but still signaling caution. As one market strategist put it, "The Fed's cuts might cool the economy, but Trump's policies could heat it right back up, creating a tug-of-war on yields."

The broader economic impact of these dynamics is multifaceted. On one hand, lower rates typically spur economic activity by making credit cheaper. Small businesses, for instance, could access loans more affordably, fostering job creation and innovation. Consumer spending, which accounts for nearly 70% of GDP, might rebound as lower mortgage and auto loan rates free up disposable income. Yet, the specter of resurgent inflation under a Trump administration looms large. If tariffs inflate import prices, everyday Americans could face higher costs for electronics, clothing, and automobiles, eroding purchasing power. This could lead to a stagflation-like scenario—stagnant growth coupled with persistent inflation—reminiscent of the 1970s, though modern economists argue the Fed's tools are more sophisticated today.

A critical lens must also be cast on capital expenditures, or capex, which represent businesses' investments in equipment, technology, and infrastructure. In a low-rate environment, capex often surges as companies borrow cheaply to expand. Historical data from the post-2008 era shows that each percentage point drop in rates correlated with a 5-7% uptick in corporate investment. With the Fed eyeing a 1% cut, sectors like manufacturing, renewable energy, and tech could see accelerated spending. For example, the Biden-era Inflation Reduction Act has already primed clean energy capex, and lower rates would amplify this by reducing financing costs for solar farms and electric vehicle plants. However, Trump's potential rollback of green incentives and emphasis on fossil fuels could redirect capex flows toward oil and gas, altering the economic landscape.

Experts are divided on the net effects. Paul Krugman, Nobel laureate economist, has warned that aggressive tariffs could undermine the Fed's efforts, stating in a recent op-ed that "monetary policy can't fully offset fiscal recklessness." Conversely, optimists like Larry Kudlow, a Trump economic advisor, argue that deregulation and tax cuts will unleash "animal spirits" in the economy, making rate cuts a complementary boost rather than a necessity. Wall Street firms are modeling scenarios: JPMorgan Chase forecasts 2.8% GDP growth in 2026 with cuts but warns of 4% inflation if tariffs bite hard. Meanwhile, the housing market stands to benefit immensely—lower yields could drop 30-year mortgage rates to 6%, potentially adding 500,000 home sales annually, per National Association of Realtors estimates.

Geopolitically, these rate cuts don't occur in a vacuum. Global central banks, from the European Central Bank to the Bank of Japan, are also easing, creating a synchronized downturn in rates that could weaken the dollar and boost U.S. exports. But Trump's "America First" trade wars might counteract this, leading to retaliatory tariffs and supply chain disruptions. Domestically, income inequality could widen if capex favors high-tech sectors over traditional manufacturing, leaving blue-collar workers behind.

Looking ahead, the Fed's balancing act will be tested. If inflation remains tame, deeper cuts could follow, perhaps totaling 150 basis points by 2027. But persistent price pressures might force a pause or even reversals, echoing the Fed's 2019 pivot. For businesses, the message is clear: hedge against volatility. Companies are already ramping up capex in anticipation, with S&P 500 firms reporting a 10% year-over-year increase in investment plans. Tech giants like Apple and Amazon are pouring billions into AI infrastructure, betting on lower rates to fuel expansion.

In essence, the Fed's 1% rate cuts represent a calculated gamble amid Trump-era uncertainties. They could stabilize yields, curb inflation, and ignite capex-driven growth, fostering a soft landing. Yet, the economic impact hinges on policy interplay—tariffs versus tax cuts, deregulation versus deficits. As markets digest these possibilities, investors and policymakers alike must brace for a bumpy ride, where the path to prosperity is anything but straight. The coming months will reveal whether this monetary easing becomes a catalyst for revival or merely a Band-Aid on deeper structural wounds. (Word count: 1,048)

Read the Full Fortune Article at:
[ https://fortune.com/2025/07/19/fed-rate-cuts-1-percent-trump-inflation-treasury-yields-economic-impact-capex/ ]