What My Grandmother Knew That Trump Doesn’t

The deposit slip I found in my grandmother’s affects years ago says Donald Trump does not understand interest rates. That’s bad for all of us.

On Wednesday last week, the Federal Reserve raised interest rates for the first time since 2023. Hours later, an aggrieved Trump posted that rates should be 1% or less because America is, quote, “the best credit in the world, by far.”

It’s a demand Trump has made for more than a year. He threatened to fire former Fed Chair Jerome Powell for refusing to lower interest rates despite America’s ongoing inflation. And when replacing Powell, Trump said, quote: “I’m going to put somebody [in as Fed chairman] that wants to cut rates.”

Which makes Kevin Warsh’s vote last week to raise rates so infuriating for Trump.

Warsh is the chairman that Trump hired.

And he voted against Trump’s demand.

Trump’s logic about 1% rates kinda sounds right. All of us have been told that a good credit score means a lower rate—on a car, a house, a credit card. So he’s selling a rule we already know to be true, and he’s betting his supporters will assume the same logic applies to countries selling their own debt.

It doesn’t.

Now meet my grandmother, an orphan who never finished high school and never understood economics beyond paying her bills.

In 1980—or around then, at least; I’m going from memory here—I stood next to her at the Corporate Boulevard branch of Louisiana National Bank in Baton Rouge while she locked up $20,000 in a 10-year certificate of deposit—all the money she had in life.

The bank paid her 15%.

I know because I found the original, yellow Customer Copy of her deposit slip when I was cleaning out her file cabinet after she passed away nearly a decade ago.

In the early 1980s, America was the single best credit on earth.

The Soviet Union was still a thing.

Europe was a dozen separate currencies with a dozen central banks, and nothing that could rival the dollar in trading volume.

Every rating agency had awarded triple-A status to American debt.

But credit risk doesn’t define the interest rate the Fed sets.

Rates are a function of what’s going on with the economy.

And in the late ’70s and early ’80s, inflation was ravaging the US economy. Because of that, the Fed launched interest rates to 20% by 1981, from under 7% at the start of 1978.

Jump to 2020. America had already lost one of its triple-A ratings—Standard & Poor’s downgraded the US in 2011—but the Fed shoved rates down to zero. America’s credit risk was worse, yet rates went to the floor.

If credit risk set rates, then 1981 and 2020 are both entirely backwards.

But rates set by the Fed have never been a way to grade America’s creditworthiness. They’re a thermometer measuring how fast the dollar is burning up because of inflation.

So why would a president say otherwise?

Because presidents long before Trump have wanted cheap money for as long as there’s been a Fed to squeeze.

In December 1965, Lyndon Johnson summoned Fed chairman William McChesney Martin to his Texas ranch, and physically pushed him around the room, screaming at him for raising rates while boys were dying in Vietnam.

Richard Nixon spent 1970 to 1972 browbeating Fed Chairman Arthur Burns into submission. Burns eased, and the runaway inflation of the 1970s followed, which forced new Fed chair Paul Volcker to push rates to 20% to kill it—regardless of America’s credit rating.

That’s what gave my grandmother her 15% CD.

Here’s what happens if Trump were to get his 1%.

The Fed controls one number: the Fed Funds Rate, the interest rate banks charge each other for overnight money.

The Fed does not control the 10-year Treasury, which sets your mortgage. The bond market sets that.

If Trump strong-armed the Fed into cutting rates to 1%, bond investors would shove rates higher across the board, pissed that the Fed isn’t fighting inflation. So, they would demand more return to cover inflation’s impact on their spending-power over the next 10 years.

Mortgage rates would push higher.

That would deepen the affordability crisis already pillaging American wallets, and it would drive down real estate prices—the thing most American families count as their wealth… so, consumer sentiment would collapse, and Wall Street would dive because of fears that the consumer is retrenching.

Market interest rates in America would go up. The dollar would go down. Your costs would escalate.

If you’re already in gold, you get paid.

The saver—the retiree with a CD, the person who stashes money in a savings account every month—they get less than 1% return on their money that’s losing 3.4% a year to inflation.

That becomes the Trump Saver’s Tax.

So when you hear the President say America deserves an interest rate of 1%, remember my grandmother got a 15% yield when America was the best credit risk in the world, but only because inflation was out of control.

Federal Reserve rates have never been a comment on credit risk. They’re a story about the economy.

My grandmother never finished high school, and she understood that.

The President went to Wharton.