Trump’s Impossible Game: Lower Interest Rates or Political Survival

A growing space has appeared between the Federal Reserve and the financial markets on the path of interest rates of the United States in 2026. While the Fed signals caution about more cuts, the markets moved on two to three cuts this year.

At the heart of this disconnect lies an uncomfortable paradox: President Donald Trump’s push to cut interest rates may be affected by the very inflation that threatens his political survival.

Markets are betting on a cut in interest rates in the middle of the year

According to the predictive market platform Polymarket, the probability… The rate was cut at the Federal Open Market Committee (FOMC) meeting in January It is only 12%. Most participants expect prices to remain stable Moved this month.

But the picture changes dramatically in the longer term. The probability of a price cut in April rises to 81%, and by June it reaches 94%. Over the full year, the scenario of two cuts has the highest probability at 24%, followed by three cuts (20%) and four cuts (17%). Combined, the probability of two or more reductions exceeding 87%.

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CME FedWatch toolwhich reflect expectations built into interest rate contracts, paint a similar picture. The probability of keeping the January contract is 82.8%, which is very close to Polymarket. The probability of at least one reduction by June is 82.8%, while the probability of two to three reductions by the end of the year is 94.8%.

The market consensus is clear: Continue in January, start cutting in the first half, and provide two to three cuts from December.

Index Falcons in the Federal Reserve: No need to rush

But inside the Fed, a different narrative is taking shape. On January 4, the head of the Federal Reserve Bank of Philadelphia noted Anna Paulson He noted that further interest rate cuts may not be appropriate until “later in the year”.

Paulson, who holds a voting seat on the Federal Open Market Committee through 2026, said that “some additional minor adjustments to interest rates will be approved later in the year” – but only if inflation declines, the labor market stabilizes, and growth remains at 2%. She described the current policy stance as “still somewhat restrictive,” noting that she continues to work to reduce inflationary pressures.

His comments are in sharp contrast with the market’s expectations for a rate of interest rates in the first half. The message from the hawkish Fed camp is clear: Don’t expect any action anytime soon.

Federal Open Market Committee in December: A divided committee

a statement December Federal Open Market Committee meeting How divided is the Federal Reserve?

The committee cut interest rates by 25 basis points, bringing the target to 3.5-3.75%. But the vote was split 9-3, a larger margin than the previous 10-2 decision. Two members, Schmid and Goolsby, favored keeping prices stable. On the other hand, Miran – widely seen as aligned with the Trump administration – pushed for a 50 basis point cut.

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The plot point told a more revealing story. While the median forecast indicated only a decline in 2026, the distribution was wide. Seven officers expected no cuts, while eight saw two or more cuts. As for more gradual expectations, interest rates will fall to 2.125%.

Official Federal Reserve guidance suggests a cut. Markets are priced in two parts. Why this persistent gap?

Why markets are betting on pigeons: The Trump factor

The main reason why markets refuse to accept the guidance of the Federal Reserve is President Donald Trump.

Since returning to office, Trump has consistently pressured the Federal Reserve to lower interest rates. The Federal Open Market Committee vote in December — in which a Trump-leaning official pushed for aggressive easing — exemplifies this dynamic.

Most importantly, Fed Chairman Jerome Powell’s term ends in 2026. The power to appoint his successor rests with the president. Market participants widely expect Trump to appoint someone more sympathetic to his preference for looser monetary policy.

Structural factors reinforce this view. Historically, the Federal Reserve has turned to cutting interest rates when the labor market weakens. Divisions within the Federal Open Market Committee run deep. There are concerns that tariff policies may slow economic growth, increasing pressure to ease money.

The market’s bet is clear: Trump’s pressure, coupled with a potential economic slowdown, will eventually force the Fed to make up its mind.

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The Midterm Paradox: Inflation Is Trump’s Achilles Heel

Herein lies the central paradox. For Trump to effectively pressure the Fed, he needs political capital. But the capital was eroded – by inflation.

Recent polls show that Trump’s approval rating on economic policy has fallen to 36%. in A PBS/NPR/Marist poll57% of participants disapproved of their economic management. found CBS/YouGov poll 50% of Americans say their financial situation has deteriorated under Trump’s policies.

The reason is the high price. Second For data from the Bureau of Labor StatisticsGround beef prices have increased by 48% since July 2020, while a McDonald’s Big Mac has increased from $7.29 in 2019 to more than $9.29 in 2024. Egg prices More volatile, jumping about 170% between December 2019 and December 2024. “Affordability” has become the economic concern. In the NPR/PBS News/Marist poll, 70% of Americans said the cost of living in their area is “unaffordable” for the average family, up from 45% in June.

This dissatisfaction is already beginning to show in the votes. In the race for mayor of New York City, last November, Democratic Rep. Zahran Mamdani won on the basis of making the city more resilient. Democratic candidates also captured governorships in Virginia and New Jersey by focusing on reducing the cost of living.

With the midterm elections approaching in November, more than 30 Republican members of the House have already announced that they will not run for re-election. Political analysts are increasingly predicting a Republican defeat and a potential “limp duck” scenario for Trump.

Three scenarios, no easy path

The intersection of monetary policy and electoral politics produces three possible scenarios for 2026—none of which gives Trump everything he wants.

Scenario 1: Inflation remains high. Trump faces political risks, and he may lose the midterm elections and enter the lame duck state. But high inflation also means the Fed has no justification for cutting interest rates. Trump’s weak position reduces his ability to pressure the central bank.

Scenario 2: The economy cools sharply. Trump takes a tougher political hit as voters chastise him for the weak economy. However, the Fed gets a clear justification for cutting interest rates to support growth.

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Scenario 3: soft landing with moderate inflation. Trump’s political position may recover as economic anxiety eases. But with the economy doing well, the Fed has little reason to cut interest rates.

In none of these scenarios does Trump achieve political power and low interest rates. The two goals are fundamentally opposed.

The data that determines everything

The next economic releases will be the critical variables that shape Federal Reserve policy and Trump’s political destiny.

The consumer price index (CPI): A decline would strengthen the case for lower interest rates and provide Trump with political relief. An increase would constrain the Fed and increase voter backlash against the administration.

Producer price index (PPI): As a leading indicator of consumer prices, a falling CPI indicates a future CPI adjustment. A rising PPI may indicate that tariff price pressures are beginning to materialize.

Employment data (unemployment rate): Weakening labor markets will increase pressure on the Federal Reserve to cut funding — but it will also hurt Trump’s economic record. Stable employment will give the Fed cover to maintain its dovish stance.

Conclusions

The Fed is targeting a rate cut in 2026. Hawks players like Paulson indicate that may not happen until the second half. However, markets continue to take two to three cuts, betting that pressure from Trump and Powell’s succession will eventually push the Fed toward economic easing.

But here lies the paradox: persistent inflation weakens Trump’s political position, weakening his influence over the Fed. The same conditions that make interest rate cuts politically desirable for Trump also make them economically unjustifiable — or strip him of the authority to demand them.

“It’s the prices, stupid” applies to Trump, the Fed, and market participants. Ultimately, inflation and employment data will determine the course of US interest rates and the outcome of the November midterm elections at the same time. Trump may want political survival and lower interest rates, but the economy is unlikely to grant that luxury.