By Howard Schneider
WASHINGTON (Reuters) - U.S. President Donald Trump on Wednesday called on the "boneheads" at the Federal Reserve to push interest rates down into negative territory, a move reluctantly used by other world central banks to battle weak economic growth that risks punishing savers and banks' earnings in the process.
Trump, in a pair of Twitter posts, said negative rates would save the government money on its debt, which including Social Security accounts has reached a record $22 trillion (17.80 trillion pounds) on Trump's watch. He did not address the risks or financial market tensions that central banks in Europe and Japan have confronted as a result of their negative rate policy, or the larger issue that negative rates have not secured higher growth or higher inflation for those economies.
"The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term," Trump tweeted. "We have the great currency, power, and balance sheet... The USA should always be paying the ... lowest rate. No Inflation!"
"It is only the naïveté of (Fed Chairman) Jay Powell and the Federal Reserve that doesn't allow us to do what other countries are already doing," added Trump, who has repeatedly noted that rates are negative in Germany, Europe's trading powerhouse.
The president's comments precede a week in which the world's major central banks, including the Fed, are expected to lower rates or otherwise loosen monetary policy in what is widely seen as a move to protect the global economy against risks partly rising from Trump's trade war with China.
But the quarter of a percentage point cut expected by the Fed is not likely to satisfy Trump, who has called on Powell and the Fed to quickly and dramatically cut rates as a way to boost slowing U.S. economic growth ahead of his re-election bid next year.
Last month, however, Trump told reporters at the White House that he did not want to see negative rates in the United States, and analysts on Wednesday said the still-growing U.S. economy would be put at risk if the Fed pursued them.
While perhaps appropriate in "recessionary" conditions, zero or negative rates in a growing economy with record-low unemployment "may ultimately create the next financial crisis - people taking on more risk than they would otherwise because money is even cheaper," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
Trump has bragged about his use of debt as a real estate investor. As far as managing the federal government's affairs, interest on outstanding U.S. Treasury securities will be nearly $400 billion in the current fiscal year and rise to more than $914 billion by 2028, according to the Pew Research Center.
Still, interest accounts for about 8.7% of all federal outlays, down sharply from the mid-1990s when it accounted for more than 15% of spending following an era of ultra-high interest rates in the 1970s and 1980s, the Pew data showed.
A White House official who asked to speak on background said in response to the president's tweets that "the president is looking at every tool available to lower the national debt and we ask Congress to join us in cutting back on wasteful spending."
"ENEMY" POWELL TO SPEAK NEXT WEEK
Trump handpicked Powell as head of the U.S. central bank, but quickly soured on his by-the-book approach and insistence on Fed independence.
The president last month referred to him as an "enemy" on par with the head of the communist-led Chinese government and kept up his personal line of attack on Powell and the Fed in his tweets on Wednesday: "A once in a lifetime opportunity that we are missing because of 'Boneheads.'"
On Friday, Powell said the Fed would act appropriately to help maintain the U.S. economic expansion and that political factors played no role in the central bank's decision-making process.
He will hold a news conference next Wednesday at the end of the Fed's two-day policy-setting meeting.
The Fed cut interest rates in July for the first time in more than a decade. Financial markets expect the Fed to again lower its benchmark rate, currently at 2.00-2.25%, when it meets Sept. 17-18.
Despite Trump's name-calling, U.S. Treasury Secretary Steve Mnuchin told reporters at the White House on Monday he expected Powell's job was safe, despite months of speculation that the president could seek to oust him.
Fed officials have downplayed the idea of setting their target policy rate below zero as politically untenable and not worth the risks. The policy is meant to account for extremely weak economic conditions by, in effect, charging banks to hold reserve deposits at the Fed.
In theory those banks would put the money to more productive uses. But it raises risks.
Banks might pay less to savers as a result, and it can make it more difficult to operate at a profit. In addition, while the Fed's policy rate influences other borrowing costs, the interest rate on long-term government bonds Trump alluded to in his Tweet are set by larger market forces and depend mightily on perceptions about economic growth.
The yield on 10-year Treasury notes has collapsed by half in recent months to a near record low — a reflection of doubts about the global economy and the impact of Trump’s trade war as much as of Fed policy. Trump has cited the negative yield on Germany’s 10-year bond approvingly, but it is a product of an economy nearing or perhaps in recession.
The Washington Post, citing public filings and financial experts, reported last month that Trump could also personally save millions of dollars a year in interest if the Fed lowers rates, given the outstanding loans on his hotels and resorts.
(Additional reporting by Susan Heavey, Trevor Hunnicutt, Sinead Carew and Lindsay Dunsmuir; Editing by Bernadette Baum and Andrea Ricci)