The Rate-Cap Paradox: Why Trump's Moves Are Tearing the Transmission Mechanism Apart

Let's cut through the noise. Over the past 48 hours, we've watched two seemingly separate policy moves that are actually the same move—just aimed at different pressure points.

On Friday, Trump called for a one-year, 10% cap on credit card interest rates. Then, Monday evening through Tuesday morning, the administration escalated its war on Jerome Powell by escalating a DOJ investigation into the Federal Reserve's headquarters renovation. Powell fought back hard. Treasury yields spiked. Bank stocks tanked. JPMorgan Chase, Capital One, American Express—the card issuers who would be gutted by a rate cap—all slumped.

The surface read is obvious: Trump wants growth, lower rates, relief for consumers. But something deeper is happening here. These aren't two policies. They're the same policy applied from two directions—one a sledgehammer to banks' profitability, the other a crowbar prying open the Fed's independence. And they're tearing apart the very transmission mechanism that made the financial system work.

The Credit Card Rate Cap Illusion

Let's start with the easier one to dissect: the credit card rate cap.

Trump announced a 10% ceiling on credit card interest rates with no legislative pathway, no enforcement mechanism, and a deadline of January 20 that he's already met (it's now the 14th). Which means he's immediately violating his own mandate. The banks, of course, are panicking—card issuer stocks are down 1-3%, and there's genuine confusion about whether this is theater or threat.

Here's the thing everyone's missing: the cap doesn't actually need to work to achieve its purpose.

Card companies currently charge 22-30% on average. A 10% cap would annihilate their margins on subprime lending. The industry's response has been predictable—they'll shrink access, cut rewards, raise other fees. And that's the whole point. Trump gets to tell voters he's protecting them from "rip-off" rates. The banks scramble to adapt their business models. Consumers with weak credit are quietly squeezed out of the market. And everyone moves on.

Except—and this is the structural part—the credit card market isn't actually a free market. It's a regulated oligopoly kept alive by political tolerance. The moment a president signals intolerance, the game changes. Trump just signaled intolerance. Capital One, Visa, Mastercard, Amex—they're all recalibrating. They're not fighting this in Congress because they can't win that fight. They're hoping for a negotiated compromise somewhere between 10% and 22%.

The irony? This probably works. Fed data shows a 10% cap could save Americans $100 billion annually. But the catch is that millions of people would lose access to credit entirely. And those people don't know who to blame yet.

The DOJ Probe as Political Instrument

Now flip the perspective. On the same week Trump is attacking banks from the consumer side, his administration is attacking the Federal Reserve from the institutional side.

The DOJ subpoenaed Powell over the Fed's $2.5 billion headquarters renovation. Cost overruns: $600 million (from $1.9B to $2.5B). Powell has explained it clearly—inflation, asbestos, lead. "There's no new marble," he testified. No marble. And yet here we are with subpoenas, grand juries, and talk of criminal indictment.

Powell fought back in a way Fed chairs almost never do. He released a video statement Sunday night—unusual, direct, combative. He called it what it is: a pressure campaign designed to coerce the Fed into lowering rates against its judgment. He said monetary policy should "continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation."

The market understood immediately. Treasury yields spiked to a four-month high. Bank stocks bounced hard. JPMorgan Chase, Capital One, and American Express sank as stocks generally remained cautious amid concerns about central bank independence.

But here's where the structural problem deepens: the Fed actually capitulates when you apply enough pressure. Not immediately. Not obviously. But eventually.

According to several analysts, the Justice Department criminal investigation makes it less likely that the Fed will lower interest rates this year, even though that's supposedly what Trump wants. So by attacking Powell to force rate cuts, Trump may have accidentally guaranteed higher rates. The Fed will avoid cutting precisely because cutting now looks like capitulation.

This is what happens when you breach the independence firewall. The central bank stops optimizing for the economy and starts optimizing for its own survival. It becomes defensive. It becomes cautious. It tightens when it should ease, eases when it should tighten.

The Transmission Breaks

Here's the thing that should terrify you: the Fed controls monetary policy, but it doesn't control monetary transmission. The transmission happens through banks. And banks, right now, are facing margin compression from both directions.

The credit card cap crushes their lending margins. The Fed independence assault makes them uncertain about regulatory risk. And Powell's willingness to fight back publicly signals to the entire financial system that the Fed chair might now be in a position of weakness—not strength.

BNY Mellon's CEO called the DOJ attacks on the Federal Reserve "counter-productive" to the Trump administration's own goals of boosting the US economy. He's right. But it goes deeper: counter-productive policies force institutions to behave defensively. When banks get defensive, they tighten credit. When credit tightens, growth slows. When growth slows, the unemployment rate ticks up. And when unemployment rises, the Fed feels pressure to cut rates.

So Trump attacks the Fed to force rate cuts. This makes the Fed defensive. Defensive Fed = tighter credit. Tighter credit = slower growth. Slower growth = rising unemployment. Rising unemployment = the very conditions that would justify rate cuts, but now the Fed can't cut without looking like it folded under political pressure.

It's a policy trap he's designed for himself.

The Real Battlefield

The credit card rate cap is a sideshow. The real issue is whether the Federal Reserve remains an independent institution or becomes an arm of the executive branch. Every living former Fed chair has already made their position clear—this is described as "an unprecedented attempt to use prosecutorial attacks to undermine that independence."

What's happening in the next few months will determine whether the dollar remains the world's reserve currency. Not because of inflation, not because of deficits, but because institutional credibility is the only thing that backs fiat money. The moment investors believe the Fed is politically captured, the dollar weakens, inflation rises, and borrowing costs spike.

And that'll hit consumers harder than any credit card rate cap ever could.

The credit card companies will adapt. The markets will find an equilibrium. But if the Fed's independence doesn't survive the next six months—if Powell gets fired or pressured into resignation, if his replacement is someone who owes political loyalty rather than institutional duty—then we're in a different system. A weaker one.

Alphabet hit $4 trillion in market cap this week on productivity optimism. But productivity gains only matter if the currency holding their cash reserves maintains its value. Right now, Powell is fighting for that value. And it's unclear if he'll win.

Watch the May deadline. That's when Powell's term as chair expires. That's when we find out whether the U.S. still has an independent central bank, or whether we're something closer to Turkey, circa 2022.