This week, U.S. President Donald Trump softened his tone on "Federal Reserve interest rate cuts." After applying unprecedented pressure on the Fed for over a year, he hinted that he would give incoming Fed Chair Kevin Warsh some leeway. When asked in an interview on Tuesday whether Warsh would still cut rates given the prevailing market view that a Fed hike is more likely, Trump replied, "I'm going to let him do what he thinks." Trump added, "He's a very talented guy, he'll be fine, he'll do a great job."
This is not the first time Trump has "walked back" pressure on the Fed for rate cuts. Earlier this week, he stated in an interview that rising inflation linked to the conflict with Iran complicates the outlook for U.S. rate cuts. A full assessment of inflation data can only happen once the Middle East conflict stabilizes. "You can't really see the data until the war is over," Trump said at the time, referring to the impact of oil price increases tied to the Iran conflict.
Since beginning his second term, Trump has repeatedly criticized outgoing Fed Chair Jerome Powell for not cutting rates as quickly as he desired. A White House official said Monday that Trump will hold a swearing-in ceremony for Warsh this Friday, making him the Chair of the Federal Reserve Board. The 56-year-old lawyer and financier will then officially succeed Powell at the helm of the Fed.
Economists have consistently noted that Warsh will face a difficult start. Markets are closely watching whether Warsh can chart a policy course different from the President's wishes ahead of the critical midterm elections in November.
What does Trump's shift in attitude signal? Analysis suggests Trump's latest remarks appear to acknowledge that Warsh holds only one vote among the 12 on the Fed's rate-setting committee, the Federal Open Market Committee (FOMC). Derek Tang, an economist at Monetary Policy Analytics, analyzed, "Trump seems to understand how the FOMC works, and he likely won't get his way, at least not initially."
"It sounds like the White House is laying the groundwork early because we certainly won't get a rate cut in June. This also creates breathing room for Warsh to find his footing in his first few months," he said. However, Tang added that as the November midterms approach, the White House's patience with Warsh may wear thin. He pointed out that for Republicans to replicate their 2024 success, voter sentiment on the economy must improve by September.
Currently, expectations for a Fed rate cut this year have nearly been extinguished, while expectations for a rate hike in financial markets are rising sharply. Traders in derivatives markets believe the probability of a Fed hike by December has reached 60%.
Clearly, Trump's accommodating attitude toward Warsh contrasts sharply with his previous harsh criticism of Powell. This shift in stance highlights the significant change in the global financial market environment. As the U.S.-Iran stalemate persists and inflation concerns mount, the global bond market has recently faced heavy selling. Soaring bond yields threaten not only risk assets like U.S. stocks but also increase the U.S. fiscal burden.
Several analysts note that only a hawkish stance from the Fed can stabilize the relentlessly rising bond yields. Otherwise, the central bank risks being seen as behind the curve, which could push yields even higher as investors demand a greater inflation risk premium.
Wall Street veteran Ed Yardeni, founder of investment advisory firm Yardeni Research, recently warned that the incoming Fed Chair Warsh, originally sent to the Fed to lower rates, may instead need to push for rate hikes to establish credibility. The timing for such a hike, he suggests, is "imminent"—likely as soon as July.
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