BREAKINGVIEWS-Trump pours costly gasoline on US fiscal fire

By Gabriel Rubin

WASHINGTON, May 13 (Reuters Breakingviews) - For someone who so desperately wants lower interest rates, President Donald Trump has an odd way of pursuing them. A standoff with Iran and more spending won't work any better than his Federal Reserve bullying campaign. Yields on longer-maturity bonds are rising as investors fret about the country's fiscal trajectory.

U.S. federal debt just surpassed annual economic output for the first time in 80 years. The ratio is on track to rise beyond 150% of GDP by 2050, the Congressional Budget Office projects. Unpredictable events that feed inflation and lower growth will only worsen the debt spiral and investment prospects.

Recent developments amplify Trump's interest-rate missteps. Brute force backfired, with Jerome Powell deciding to stay on the Fed board after his chairmanship ends this month rather than resign, as is convention. If he stays until January 2028, when his term expires, it would prevent the president from nominating someone to replace him.

Trump's decision to join Israel in attacking Iran, meanwhile, triggered a supply shock. Secondary effects are pushing up production costs and creating shortages of jet fuel and other essentials. The U.S. budget strain may intensify, with the administration now seeking $1.5 trillion for the military next year. The Middle East conflict already has cost $29 billion, an official figure that sounds low and doesn't take into account second-order costs.

All of this recalls the folly of last year's outlandish promises to slash $2 trillion in federal spending. Billionaire Elon Musk's now-disbanded Department of Government Efficiency achieved little. Trump’s latest tax cuts will chew up some $4.5 trillion over the next decade, with only small offsets from cuts to nutrition and health programs, which tend to produce more economic growth than they cost anyway.

What's more, the president is asking for another $70 billion for immigration enforcement to help preserve congressional Republican majorities. Trump also wants $1 billion authorized for his ballroom project, adding to an annual deficit already projected to reach about $1.9 trillion this year.

The country already pays about $1 trillion a year for interest on its debt. The yield for 30-year Treasury bonds has jumped to 5% from 4.6% on the day before the bombing in Iran began. Earlier market indications for two interest rate cuts this year also have dropped to one or none. Reversing the trajectory will be difficult without making more prudent choices about how to cover the government's mounting costs. For now, there's nothing to suggest Trump has any rational plan to turn his Fed dream into reality.

Follow Gabriel Rubin on Bluesky and LinkedIn.

CONTEXT NEWS

U.S. national debt reached $31.27 trillion at the end of March, exceeding the $31.22 trillion of gross domestic product over the preceding 12 months, according to data released by the Bureau of Economic Analysis on April 30. The country's record ratio was 106% in the immediate aftermath of World War Two.