Trump's Unthinkable Bet: Lower Interest Rates or Political Survival?

A widening gap is forming between the US Federal Reserve (Fed) and the financial markets surrounding the 2026 interest rate trajectory. While the Fed continues to signal caution, not rushing to loosen policy, the market is strongly betting on a scenario of 2–3 rate cuts this year. Behind this disagreement lies a risky political paradox: 👉 The more Donald Trump wants to cut interest rates, the more inflation threatens his political survival. Market Bets on Rate Cuts from Mid-Year According to data from Polymarket – a prediction market platform – the probability of the Fed cutting rates at the January FOMC meeting is only about 12%, virtually guaranteeing no change in interest rates. However, the picture changes completely when looking further ahead: Probability of at least one cut before April: 81%Before June: 94%Full-year scenarios:2 cuts: 24%3 cuts: 20%4 cuts: 17% ➡️ The chance of 2 or more cuts exceeds 87%

The CME FedWatch tool – reflecting market expectations from interest rate futures contracts – shows similar results: Hold rates steady in January: 82.8%At least 1 cut before June: 82.8%2–3 cuts before year-end: 94.8% 📌 Market consensus: Hold steady early in the year – start cutting in the first half – end the year with 2–3 rate reductions. Hawkish Fed: “No Need to Rush” Conversely, the Fed is sending a firmer message internally. On January 4, Anna Paulson, Chair of the Fed Philadelphia – a voting member of the 2026 FOMC – said: “Any rate cuts, if they happen, are most likely to occur late in the year.” She emphasized: Cut only if inflation continues to coolLabor market remains stableGrowth approaches 2% Paulson describes current policy as “still mildly tightening,” and it continues to be effective in restraining inflation. 📌 The hawkish message is very clear: Don’t expect the Fed to follow the market’s early cues. FOMC December: A Deeply Divided Fed

The December FOMC meeting clearly revealed internal divisions: 25 basis point cut, bringing rates to 3.5–3.75%Vote 9–3, more tense than previous 10–2Schmid and Goolsbee: want to keep rates unchangedMiran (, considered pro-Trump): proposed a 50 basis point cut The Dot Plot drew even more attention: Median forecast: only 1 cut in 2026But:7 officials: no cuts at all8 officials: 2 or more cutsThe most dovish scenario: rates back to 2.125% 📌 The Fed says 1 cut – markets bet on 2–3 cuts. Why Doesn’t This Gap Narrow? Why Do Markets Believe the Bullish Faction? Trump Factors The answer lies with Donald Trump. Since returning to the White House, Trump: Has repeatedly criticized the FedPublicly calls for lower interest ratesStrongly supports easing officials More importantly: Jerome Powell’s term ends in 2026The President has the power to nominate a new Fed Chair ➡️ Markets believe Trump will choose someone more “obedient” Additionally, many factors support expectations of rate cuts: The Fed often pivots when the labor market weakensInternal divisions deepenRisks from tariffs and trade wars could slow growth 📌 Market bets: Political pressure + slowing growth = Fed forced to concede. Paradox of Term Limits: Inflation as Trump’s Achilles’ Heel The issue is: Trump needs political strength to pressure the Fed, but inflation is eroding that very strength. A series of surveys show: Support for Trump’s economic policies: 36%57% dissatisfied (PBS/NPR/Marist)50% of Americans say personal finances are worse (CBS/YouGov) Main cause: rising prices Ground beef: +48% since 2020Big Mac: from $7.29 → $9.29Eggs: +170%70% of Americans say the cost of living is “unacceptable” Political consequences have already appeared: Democrats win big in New York CityWin gubernatorial races in Virginia, New JerseyOver 30 Republican lawmakers announce they will not seek re-election ➡️ The risk of Trump becoming a “lame duck” after the midterms is very clear. Three Scenarios, No Perfect Exit Scenario 1: Prolonged High Inflation Trump loses political pointsFed has no reason to cutTrump’s weakness → harder to pressure the Fed Scenario 2: Strong Economic Cooling Fed has a reason to cut ratesBut Trump faces heavier political blows Scenario 3: Soft Landing Inflation decreases, economy stabilizesTrump has an easier timeBut the Fed doesn’t need to cut 📌 No scenario offers Trump both: political power and low interest rates. Economic Data: The Final Decider Three data groups will determine everything: CPI: Decrease → opens the door for rate cuts | Increase → Fed is powerlessPPI: Leads CPI, especially amid tariffsEmployment (NFP, unemployment):Weak → Fed cuts but Trump loses pointsStrong → Fed keeps rates steady Conclusion The Fed is signaling only one cut – possibly at the end of the year. Markets still bet on 2–3 cuts, relying on Trump and Fed personnel changes. But the paradox is: Higher inflation makes Trump weaker – and less able to pressure the Fed. “It’s the prices, stupid” – not only true for American voters but also for the Fed and the financial markets. Ultimately, inflation and employment will jointly determine: The US interest rate trajectoryAnd Donald Trump’s political fate in the midterm election. Trump may want both, but the economy rarely caters to politics.