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Are The President's Tweets Causing The Fed To Cut Rates?

After raising rates for over three years, the Federal Reserve cut rates last month and is expected to cut again shortly. President Trump would like the Fed to cut rates further and faster and has not been shy about criticizing his Federal Reserve Chairman, Jay Powell; President Trump has nicknamed him Clueless Jay Powell and has gone as far as tweeting, "My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?" Clearly, the president wants lower rates and is tweeting several times a week on the topic.

In recent history, the Fed has stated that it does not take political factors into consideration, although there is quite a bit of historical precedent for presidents to opine on monetary policy. Some commentators believe that Trump's rhetoric makes it more difficult for the Fed to lower rates, as they need to maintain (at least the perception of) independence. Yet, the Fed lowered rates last month and is widely expected to cut rates again. So, is the Fed lowering rates because of Trump?

Looking at the yield curve above, it seems fairly easy to dismiss the theory that the Fed is lowering rates because of presidential pressure. Firstly, many points on the yield curve are at or close to all-time lows and these rates that are not controlled by the Fed. Secondly, the Fed Funds overnight rate is currently at 2.25%, which is literally off the chart. The overnight rate is higher than any other maturity on the yield curve. The US Treasury can borrow for 30 years at a lower rate than it can for an overnight loan! The market is implying that the Fed Funds rate is too high. Put simply, the Fed is not cutting rates because the president is tweeting, but because the yield curve is forcing them to.