Trump Wants Cheap Money. Why Are Rates Going Up Anyway?

Platypus Economics with Justin Wolfers

In this episode, Justin Wolfers joins Mary Harris to dissect why U.S. interest rates are rising despite President Trump's campaign promises of cheap money. Wolfers breaks down the mechanics of

Key takeaways

• Donald Trump publicly demands lower interest rates, yet his administration's massive budget deficits and tariff policies are structurally pushing them up.
• Federal Reserve Chair Kevin Warsh recently voted to hike rates for the first time in three years, defying direct pressure from the president.
• Wolfers uses an
• analogy to explain that rising interest rates simply reflect increased demand for loans from both the U.S. government and AI data center builders.
• The Fed faces inflation driven by geopolitical shocks (Iran war) and trade policy (tariffs), but can only cool it by deliberately slowing economic activity and risking jobs.
• A unanimous 12-0 FOMC vote to raise rates signals strong institutional independence, with members appointed across presidential administrations agreeing on the need to fight price pressures.

Main topics

• Federal Reserve interest rate policy
• U.S. government budget deficits and bond market dynamics
• Inflation drivers (tariffs, Iran war, AI capital demand)

Notable quotes

"The single greatest threat to the American economy is the American government."

Conclusion

The episode provides a clear, data-driven framework for understanding why

Transcript preview

Speaker 2 (0:00) Hey there, I'm Justin Wolfers, and this is Platypus Economics, the podcast where we explore the economics that shapes your life. Today, I'm bringing you a conversation I had with Mary Harris over at Slate on their daily podcast called What Next? It's a great show. Mary's a friend and a terrific interviewer, and if you find her stuff terrific, I do, go ahead and like and subscribe to her feed. We talk about the role that economic policy is playing in US politics ahead of next month's midterm elections. And along the way, you might even hear me try and slip in a little bit of hard economic insight. So stick around if you want to hear me try to explain the envelope theorem on a daily news podcast. Speaker 3 (0:52) If there is one thing I know about our president, Donald Trump, it is that he loves cheap money. Speaker 3 (1:03) To Trump, lower interest rates on mortgages, credit cards, whatever. It is the lifeblood of the U.S. economy. It's also a campaign promise. I'm Speaker 4 (1:12) getting interest rates down, getting the economy back. Speaker 3 (1:15) He thinks the U.S. economy deserves cheap money. Speaker 4 (1:19) And your interest rates are going to be tumbling down. And Speaker 3 (1:22) Trump's told voters he's going to deliver cheap money. Speaker 4 (1:27) But we're going to get interest rates down. Interest rates Speaker 2 (1:30) are going down. It's going to be brought down. Speaker 4 (1:31) We will cut interest rates and reduce the monthly cost of your typical mortgage by $1,000. Speaker 3 (1:43) It is also pretty clear that the president thinks there are people keeping him from delivering cheap money, particularly people inside the Federal Reserve, whose open market committee votes on monetary policy. Back when Jerome Powell was running the Fed, the president made a point of pressuring him publicly to drive interest rates down. Powell mostly brushed him off. And then Donald Trump got the chance to support his own Fed chair, Kevin Warsh, who a couple weeks back did something a little surprising. Though maybe it shouldn't have been. Speaker 1 (2:15) Today, the Federal Reserve hiked interest rates for the first time in three years. President Trump's new handpicked Fed chairman, Kevin Walsh, defying the president's calls to cut rates, saying Speaker 4 (2:26) instead the Speaker 1 (2:27) Fed needed... I gotta tell Speaker 3 (2:28) you, all this left me with a few questions. But that is why I've got Justin Wolfers on speed dial. Speaker 3 (2:36) Justin, can I admit something embarrassing to you? Speaker 2 (2:39) No one's listening, so sure. Speaker 3 (2:43) I have no idea what's going on with interest rates right now. Like, no idea. Oh, Speaker 2 (2:47) it's all so easy. Speaker 3 (2:49) Just like an economist to say that. Justin says all this back and forth over the Fed's interest rate hike, it's not even the most important thing going on here. Because if you read between the lines, it seems like Donald Trump's handpicked Fed chair, he is inclined to continue raising interest rates. Speaker 2 (3:12) He thinks he hasn't tapped the brakes yet. He thinks he's only taking his foot off the accelerator. Speaker 3 (3:17) So Kevin Warsh is signaling to you that. He is, um... He's going to raise rates again. Speaker 2 (3:25) He's almost certainly going to raise rates again. Yeah. Speaker 3 (3:28) What does that mean? Because that seems important. Not that interest rates were raised, but that interest rates will be continuing to be raised. Speaker 3 (3:43) For the last decade plus, you and I have lived in the land of cheap money. Speaker 2 (3:50) We've Speaker 3 (3:51) maybe built our worlds around it. The idea that we're going to jack up interest rates. It's a little freaky for me. Sure. Speaker 2 (4:00) There are people who are in their 30s who believe that interest rates are zero more often than they're positive. Speaker 3 (4:07) That's the thing. It's like this is a big change that seems to be about to happen. Do you... Do you feel like the American economy is ready for that change? Speaker 2 (4:20) My answer is, oh boy, I was going to say it is, but I think actually the answer is going to give is we'll see, which is so gutless. Could it be enough to tip a weak economy from weak to recessionary? Sure. Absolutely. Is it going to crash an economy the way it happened in the early 80s? I would find that very, very hard to see. Speaker 3 (4:43) Today on the show, I talk interest rate anxiety with Justin. Should all this make you worried? How much? I'm Mary Harris. You're listening to What Next? Stick around. Speaker 3 (5:06) This whole show is going to be about interest rates and how they seem to be going up. Interest rates have been higher before, like not that long ago, and higher in different kinds of ways. Like pre-2008, interest rates looked a lot more like the direction they are in and trending towards now. Before that, in the 1980s, they looked even higher. I have a core memory of if you go rent Ghostbusters, there is a line where Dan Aykroyd talks about having a 12 % interest rate on his mortgage, which to me is proof like, okay, we've been here before. And yet, when I look at the Wall Street Journal, when I look at wherever to get my financial news, there is concern about what's happening now. So frame that for me, because I feel like it's important to hold both things in your head at the same time. Speaker 2 (6:03) Yeah, I think it's actually a really, really useful frame. Interest rates are two things. They're the underlying rate of inflation plus a real interest rate. The real interest rate is if when I borrow money, the nominal interest rate, you know, my home loan's probably 3%. The nominal interest rate, 3%, is how many more dollars I have to pay than I took in. The real interest rate is how much purchasing power do I lose. because I end up paying dollars that are worth less because of inflation. Speaker 2 (6:32) So the other thing that was going on back in the 80s was high inflation, high invariable inflation. So that was an era that I think more or less ended in the mid-80s. So that's the era of, let's call that the Ghostbusters era. Speaker 3 (6:45) Yeah. Speaker 2 (6:46) And Ghostbusters is gone. It's behind us.