Will Excessive US Debt Force the Fed to Cut Rates? Trump Calls for 1% Rate, but Goolsbee Warns of Backfire

Chicago Federal Reserve President Austan Goolsbee on Monday (21st) dismissed the argument that the Federal Reserve (Fed) should cut interest rates to help the U.S. government lower its debt and deficit financing costs, stressing that this very idea illustrates why central banks must maintain monetary policy independence.

Speaking at an event in London, Goolsbee told media that fiscal policy and deficit levels should be treated as "background weather"—only factored into monetary decisions when they affect inflation, with all other matters left to elected officials.

He questioned whether the Fed should lower interest rates to shrink deficits or reduce the cost of additional government borrowing, cautioning that such arguments must be approached carefully, as they represent the classic rationale for central bank independence.

According to Goolsbee, demanding that the Fed force rate cuts due to ballooning government debt is essentially "debt monetization." Most economists believe this approach could fuel inflation and backfire, as markets would demand higher yields due to rising inflation expectations, ultimately pushing up the government’s long-term borrowing rates.

Former U.S. President Donald Trump has previously advocated cutting the Fed’s policy rate to around 1%, far below the current range of 3.75% to 4.00%. He argues that the U.S., being the most trustworthy borrower globally, should naturally enjoy lower financing costs.

However, U.S. long-term government bond yields have recently continued to rise, further increasing the government’s debt financing costs. The U.S. annual fiscal deficit remains high, amounting to approximately 6% of GDP. Goolsbee’s remarks signal that the Fed will not adjust its interest rate policy solely to ease the government’s debt burden.