President Donald Trump is on the verge of making one of the most important economic changes of his second term: reshaping the leadership of the Federal Reserve after years of frustration with a central bank whose artificially high interest rates distorted markets for far too long.
Treasury Secretary Scott Bessent has said the president is expected to announce a new nominee for Fed chairman this month.
Good. The Fed’s high interest rates have made it overly difficult for people to afford goods and services — especially mortgages — and they have also artificially weakened GDP by sharply reducing consumer spending. Trump has been clear and consistent in his view that restoring credibility, predictability, and common sense at the Fed is a necessary step toward fixing America’s current economic woes, which is exactly why he is replacing the Fed’s current chairman.
That same logic, however, is why the nationwide 10% cap on credit card interest rates he announced on Jan. 8 would be a mistake.
In both policies, Trump’s instincts are rooted in concern for ordinary Americans who feel squeezed by the cost of living.
Replacing the Fed chairman will help to unwind past government-made distortions that harmed consumers. However, a blanket cap on credit card interest rates, while well-intended, would just allow the government to control interest rates in another area and would create new bureaucratic distortions. The people most hurt by these distortions would be the very ones the policy is meant to help.
There is no question that central planning in monetary policy is problematic. The Fed setting interest rates is a problem because government bureaucrats often make mistakes, and those mistakes ripple through the economy. The last thing we should want is to give those creatures of government the opportunity to make new ones.
In the private sector, interest rates are simply the price of money, shaped by risk, repayment history, and supply and demand. The government setting its price on credit cards would cause just as many problems as does the Fed’s control over interest rates.
Declaring by law that credit card interest rates must be cheaper will not magically make more credit available to low-income Americans. It will do the opposite — because when lenders are prevented from pricing for risk, they will simply stop lending to higher-risk borrowers altogether.
The people hit first by a 10% cap would not be Wall Street executives or wealthy households with pristine credit. They would be working- and middle-class people.
Research shows that even a 15% interest-rate ceiling would threaten access to credit for roughly 95% of people with credit scores below 700. Another analysis found that a 10% cap could eliminate or sharply curtail credit access for more than 14 million people nationwide.
Just look at Illinois. After the state imposed a 36% interest-rate cap on personal loans — far higher than the cap now being discussed at the federal level — access to credit for working-class and subprime borrowers fell sharply. Many former borrowers reported that when emergencies arose, legal credit options simply disappeared. The demand for credit did not go away, but the opportunities to have it extended disappeared.
The stated goal of a credit card rate cap is to increase affordability and economic activity. But the likely result would be less consumer spending — and less spending prevents GDP from reaching its full potential. That would run contrary to Trump’s goals.
The economic fallout wouldn’t end there. As missed payments rise, banks do not quietly absorb the losses. They respond by raising fees, trimming rewards programs, lowering credit limits, and tightening approval standards. Even responsible borrowers often end up paying more, just in ways that are harder to see.
THE HUMAN COST OF THE MEDICARE FRAUD SCANDAL
Trump is right to challenge distortions in the financial system. Appointing a new Fed chairman to correct past monetary mistakes is a step in the right direction. But replacing one distortion with another won’t fix what’s broken. Real reform means restoring common sense across the economy, including in how credit is priced and made available.
Bay Buchanan served as Treasurer of the United States under President Ronald Reagan.
