Trump, Powell, and the coming crash: A game of blame and bubble
If Powell had any sense of what lies ahead, he would accept Trump’s firing gladly. Accompanied by the academic protests lamenting the lack of the Fed’s independence, etc, for the record books. If Trump had any sense of what lies ahead, he would allow Powell to remain in the chair and blame him subsequently when the US Housing Bubble 2.0 comes crashing down. Trump can at least have the satisfaction of “I told you so”.
Why is Trump desperate to get the Fed funds rate down to 1% from the current 4.25 to 4.50% range? Two massive icebergs are on an imminent and direct collision course with the US Economy at this juncture, and these are:
- Bursting of the US Housing Bubble 2.0
- Interest expense as a % of Federal income headed into uncharted waters
As Trump sees it, the only way to avoid the above issues is to lower the interest rates substantially. Readers should be aware that the current rate, aside from the ZIRP era following the GFC in 2008, is low from a historical perspective. But even these are not sufficient to maintain the bubbles.
Trump challenge 1 – The Housing Bubble 2.0
The peak of the median housing prices in the current cycle occurred in Q4 2022 at $442,600. As of Q1 2025, the median sale price was $416,900. While a 5% drop is not a significant correction, two factors do not bode well for a meaningful recovery: that this drop has occurred over 30 months, and the persistent high mortgage rates are keeping affordability at an all-time low for US consumers.
The previous 30-month period’s drop in housing prices occurred from Q4 2017 to Q2 2020 (a period during which the Fed funds rate increased from 1% to 2.5%), after which the COVID-19 stimulus and a return to ZIRP reversed the declining trend in housing prices. Trump wants to orchestrate a similar move now – reduce interest rates and inject massive fiscal stimulus through the Big Beautiful Bill.
The only other period in which we have witnessed an extended drop in housing prices this century was during the 2008 housing bubble. Between Q1 2007 and Q1 2009, housing prices declined by more than 20%. Only a combination of ZIRP and QE – both unprecedented monetary measures – halted this decline.
So, as far as Trump’s eye can see, the solution to the problem of a housing crisis is a combination of ultra-low interest rates and expansion of the Fed balance sheet. The fact that, on the two occasions this was done – after the 2008 GFC and during COVID-19 – there were no deleterious consequences to report – would probably lead Trump to conclude that this extraordinary monetary stimulus can be implemented today as well.
But why can’t the housing process recover without the above measures? The housing price increases have far outpaced the growth in median incomes. The Atlanta Fed’s Home Ownership Affordability Index (HOAI) – a composite index that takes into account housing prices, principal and interest payments, as well as taxes and insurance – is at an all-time low. This index is even below the levels that led to the bursting of the housing bubble in 2008.
A level of 100 indicates that housing prices are affordable to buyers, given the current mortgage rates. The current score as of Apr 2025 is 65 – well below what makes the median house affordable to the median buyer. There are only two acceptable ways to increase affordability: either increase median wages or reduce interest rates.
As Trump sees, all roads seem to lead to lower interest rates. There is, of course, a third way (an unacceptable one, though) to increase affordability – a dramatic decline in housing prices. Given that a housing bust will be accompanied by a decrease in employment, wages, and taxes, housing price declines must rival the effects of the above to lead to an increase in the Affordability Index. A drop of at least 30% would be required to bring the index into the affordable category. A 20% decline caused the 2008 crisis, and that too, from much lower levels of housing prices.
Once again, it is easy to see why Trump is arguing vehemently in favour of substantially lower rates to stimulate the housing market.
Trump challenge 2 – Interest expense as a % of Federal income
If the housing bubble bursting is an imminent danger in the months ahead, the Interest expense of the federal government is a current millstone around Trump’s neck.
From less than 20% during Q1 2022, the interest expense as a % of Federal revenues has increased to 35% during Q1 2025. Readers might recall that the Fed hiked rates from nearly 0% during March 2022 to nearly 5.5% by July 2023. The US National debt has also increased from $30 trillion in Q1 2022 to more than $37 trillion today.
A legitimate question would be whether this is not the first time we have crossed 30%, as there were two earlier periods: the 1980s decade, when this averaged more than 40%, and the years immediately prior to the 2008 GFC.
1980s was a period in which the debt-to-GDP was less than 40% – less than one-third the current debt-to-GDP ratio of 125%. The interest expense was high primarily because the Fed funds rate was in the double digits. As these rates declined, despite the debt growing faster than the GDP throughout the 1980s, the government was quite able to manage the interest obligations without threatening to take over the Fed’s primary role. Today, we are in a situation that the Fed would prefer to call “Fiscal Dominance,” i.e., the rates must necessarily be held low due to excessive government debt.
Regarding the years preceding the GFC in 2008, the debt-to-GDP ratio was still less than 60%, allowing for growth in debt. Especially given the subsequent fifteen years of ZIRP, wherein the interest paid on the National debt declined from 4% to 1.6%. It is the reversal of this interest rate on the National debt that has created this issue for Trump today.
The interest rate paid on the National debt has increased from 1.60% during 2021 to more than 3.3% in 2025.
Now, let’s fast-forward to October 2026 and examine how the financials would look. National debt is likely to be well above $40 trillion, courtesy of the BBB (Big, Beautiful Bill). The US has to refinance more than $10 trillion of the maturing current debt between now and then. This is likely to be at rates above the current fed funds rate of 4.25 to 4.5%. Consequently, this would increase the interest rate paid on the National debt to 4% from the current 3.3%.
$40 trillion and a 4% rate would swell the interest obligations to over $1.6 trillion, representing a more than 33% increase from the current year’s estimated $1.2 trillion.
How does Trump reduce this interest outgo that threatens a further downgrade of US ratings? A downward revision of ratings would likely lead to a further increase in interest rates, and this could trigger a negative death spiral for the US government. Reducing the debt itself is out of the question, and the BBB is set to increase it dramatically. The only other possibility is to reduce the average interest paid on the National debt.
So whatever problem Trump looks at, the elixir happens to be a dramatic reduction in the Fed funds rate.
Not that a reduction in the Fed funds rate would likely lead to a decrease in either the mortgage rates or even the interest rate on the National debt. The most probable course is that these are set to rise in the years ahead quite independently of the Fed’s actions. But the muscle memory of the last few decades prevents Trump from understanding this.
Is that why Powell remains obtuse to Trump’s demands? Maybe. I am sure Powell understands that the transmission of rates will not be seamless, as it has been over the last few decades.
However, Powell has a bigger crisis that bothers him – one that is more significant than the two challenges that Trump is currently preoccupied with. Powell will know that a dollar crisis is pretty much at the shores of the US, and a dramatic cut in rates at this juncture would be throwing open the gates to invite the enemy inside. Whether Trump understands or not, the largest external holders of the US treasuries (Japan, China, Saudi Arabia) understand the precarious position the US dollar is in.
The DXY freefall
Since Trump took office earlier this year, the dollar Index has fallen more than 10%. To imagine that this fall would not lead to higher consumer prices for US imports, even without the Trump tariffs, would be a highly improbable scenario. Although the transmission of the falling dollar into higher import prices takes a few months, US consumers can expect to witness substantially higher consumer prices later this year. The trade deficits, which have typically averaged around $60– $ 75 billion per month for the last few years, averaged more than $100 billion per month for the first five months of 2025.
Powell would also know that the $10+ trillion that needs to be refinanced is unlikely to be purchased by foreign buyers, and the bulk of this would have to be monetized by the US Federal Reserve. Whether they call it QE or by any other name, the end result would be a substantial increase in the US Fed’s balance sheet.
Short of a substantial increase in interest rates, the Fed is likely to witness soaring consumer prices, courtesy of the ongoing monetary inflation and the much bigger quantum that lies ahead. However, the Fed is powerless to effect this increase, due to the two Trump challenges, and so their best plan would be to stay put for now. But to their credit, they did communicate this specific end game in an October 2023 paper titled “Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements”.
The two paths – Same outcomes
From a philosophical perspective, there really is not much of a difference between what Trump and Powell want to do. Both paths lead to the same outcomes, and the timelines are unlikely to differ significantly, perhaps a few months or a year or two at most. Both paths will eventually lead to the dollar crisis within the next couple of years.
But there is an advantage in Trump’s path from the perspective of the US Fed. In all of the previous bubbles, although the Fed was the bartender serving easy money that fomented the bubbles, it has managed to insulate itself in all the post-mortem reports.
Given that it is a dollar crisis tomorrow, it will be that much harder for them to maintain the illusion of the guardian. Trump has paved the way for them to do so and continue as Caesar’s wife, at least for a couple of years. Powell will probably grab the opportunity with both hands, albeit grudgingly in public.
Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
For all the latest updates, download PGurus App.
2. Returned to India in 2005 and have been an investor ever
since
3. Focus on investing in precious metal equities, particularly Gold, Battery Metals and Uranium Juniors.
- Interest rate cuts – A sinker to a plunging Dollar - September 18, 2025
- GST rationalization: Rearranging the deck chairs on the Titanic - September 4, 2025
- Is the Fed setting up Trump to be the scapegoat? - August 24, 2025
