Facing a far stronger-than-expected U.S. May jobs report, President Donald Trump has once again publicly pressured the Federal Reserve, explicitly calling for interest rate cuts rather than hikes. This stance creates a rare confrontation with the rapidly heating market expectations for monetary tightening fueled by the robust labor data, placing the Fed's new Chairman, Kevin Warsh, who is about to preside over his first policy meeting, squarely between economic reality and political pressure.
In an interview recorded last Friday and aired Sunday, Trump directly dismissed the market's growing calls for rate increases. "Now, when you get a good report, the market goes down because they think there's going to be a rate hike," Trump stated, adding, "There is absolutely no reason to raise rates." He further emphasized, "Raising the benchmark rate is completely the wrong thing to do. We should actually be lowering rates."
These remarks come as Warsh, personally chosen by Trump for the Fed chairmanship, is fully preparing for his inaugural Federal Open Market Committee (FOMC) meeting. Meanwhile, the market is reacting swiftly to the persistently strong labor data: traders are now fully betting on a 25-basis-point Fed rate hike by year's end.
Trump's logic against tightening is not only based on the traditional view that low rates aid economic prosperity but is also tied to his fiscal ambitions. He directly linked low borrowing costs to government spending, adding, "You know, we have debt, and other things to deal with. I want to put more into the military."
More notably, he even suggested that "economic success itself can curb inflation, just like high interest rates," attempting to use strong growth and employment as a substitute for policy tightening to combat stubborn price pressures.
The core of the divergence between Trump and the market is last Friday's release of the May non-farm payrolls report. The data showed the U.S. economy added 172,000 jobs in May, more than double the consensus forecast of economists, with March and April figures also revised significantly higher. The unemployment rate held steady at 4.3%, while more people moved directly from the sidelines into jobs or began searching for work, raising the labor force participation rate and indicating a further strengthening of the employment base.
Breaking down the numbers, leisure and hospitality led all sectors with a gain of 70,000 jobs, while local government and healthcare added 55,000 and 35,000 positions, respectively. Heather Long, chief economist at Navy Federal Credit Union, exclaimed, "The hiring recession is over. This is a strong report by any measure."
This picture of prosperity directly extinguished the last hopes for a rate cut this year. Following the data, Goldman Sachs quickly abandoned its forecast for a Fed rate cut in December, now predicting only two quarterly cuts by 2027. Stephen Brown, chief North America economist at Capital Economics, wrote after the jobs data release, "As long as the labor market does not see a summer jobs scare, the likelihood of the FOMC implementing a few 'insurance' rate hikes later this year is increasing."
The CME Group's FedWatch Tool shows the market now sees a probability nearing 47% for a 25-basis-point Fed hike in December, while the probability of a rate cut by the end of 2027 remains below 5%.
Gus Faucher, chief economist at PNC, noted, "Despite high energy prices and broad-based inflation increases, the current labor market is stronger than last year and performing quite solidly overall. There is no indication that the labor market needs policy support."
The market's bets are not without foundation. As Warsh transitions from an advocate of easing to presiding over policy meetings, hawkish voices within the Fed have significantly drowned out the doves.
Cleveland Fed President Beth Hammack stated clearly that if recent trends persist, "acting soon may be appropriate." Dallas Fed President Lorie Logan was more pointed, noting consumer spending is "solid," corporate profits are "soaring," and current interest rate levels "are not restraining the economy." She expressed "growing concern that higher interest rates may be needed later this year to fully restore price stability." Kansas City Fed President Jeffrey Schmid directly pointed out, "Now is not the time to let our guard down," stating the Fed must demonstrate a willingness to take all necessary actions to bring inflation back to 2%.
Even a former key supporter of rate cuts, Fed Governor Christopher Waller, has publicly shifted his stance. He stated, "If inflation does not subside soon, I can no longer rule out the possibility of future rate hikes," though he still advocates for temporary patience.
However, voices opposing immediate hikes still exist. Governor Michelle Bowman warned that overreacting to a temporary energy price shock could "unnecessarily weigh on economic activity and employment."
Against this backdrop, Warsh, who had hoped that AI diffusion and Trump's economic policies would bring high growth and low inflation, paving the way for rate cuts, now faces a stern reality test. Inflation metrics remain high at 3.8%, nearly double the Fed's 2% target. The International Monetary Fund, citing U.S. involvement in the Iran conflict, has pushed back its timeline for U.S. inflation to return to target to the end of 2027. Veteran economist Ed Yardeni summarized, "A hawkish recalibration is underway. Rate cuts are off the table; rate hikes are on."
In the view of Oscar Muñoz, head of U.S. economic research at TD Securities, the June policy meeting Warsh is about to chair will be a "baptism by fire." The new chairman must bridge the vast chasm between the increasingly public discussion of rate hikes within the Fed and the blunt demand for rate cuts from the president who appointed him. Although Trump said, "I have great respect for him," he did not conceal his position: "When a country is doing well, you shouldn't immediately punish it with rate hikes."
As the conflict continues to affect oil shipments through the Strait of Hormuz, the tail effects of the energy price shock are still permeating. How Warsh's FOMC will balance still-robust employment, stubborn inflation, and pressure from the White House may find its next decisive clue in the upcoming release of the May Consumer Price Index next week.
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