When Kevin Warsh took the oath of office at the White House in May, U.S. President Donald Trump lavished praise on his chosen Federal Reserve chair and urged him to act with "complete independence." "Just do things your own way," Trump told him. That promised autonomy now faces a critical test this week as persistent inflation intensifies pressure on the Fed to raise interest rates in order to cool price growth.
Data released last Friday showed that core inflation in August accelerated more than anticipated, prompting futures market investors to price in a greater than 85% probability of a rate hike at the Fed's September 15-16 meeting. This puts Warsh in a delicate position, potentially opposing a president who has repeatedly called for steep rate cuts. Trump recently warned he would escalate the trade war if the Fed failed to ease policy, and he reiterated on Sunday his argument that U.S. borrowing costs should be the lowest in the world. When asked whether he expected a rate increase at the upcoming meeting, Trump responded, "I don't know."
Internal political anxiety within the White House is amplifying the push for looser policy. With midterm elections approaching, multiple polls indicate growing voter dissatisfaction over the rising cost of living. Even though a rate cut might take months to show up in mortgage or credit card bills, lower rates would allow Trump to claim economic relief is on the way and help shift blame away from his administration. With voters heading to the polls in just weeks, Warsh finds himself caught between institutional duty and political pressure.
Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, noted that officials are trapped in a no-win scenario. "They either provoke the president's wrath or undermine their credibility in the markets, with potentially more severe consequences for inflation down the road," said the former chief economist of the International Monetary Fund. "I don't think Warsh wants to be remembered in history as the Fed chair who bowed to government pressure when the central bank's mission was on the line."
Since the latest inflation report was released, a White House official has sent mixed signals about how Trump might respond to a rate hike. On Friday, National Economic Council Director Kevin Hassett said Trump still wants lower rates, and if the Fed raises them, "the president will have something to say." By Sunday, Hassett's tone had softened. Appearing on another program, he said that while he was sure the president would not be thrilled by a hike, Trump's foremost priority would remain defending Kevin Warsh's independence.
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