Author: Mike Dolan
Compiled by: TechFlow
Deep Tide Digest: Last Friday, positive U.S. August employment data emerged, yet Trump suddenly pivoted to criticize the Federal Reserve, demanding "interest rate cuts, or else stop trading with countries with deficits." Reuters columnist Mike Dolan points out that this statement is logically incoherent and barely elicited a market reaction. However, it precisely presents an opportunity for Fed Chair Kevin Warsh, who took office this past May, to push for a rate hike this month. This move would reaffirm the Fed's commitment to its inflation target and demonstrate that he is not the White House's "puppet," thereby creating distance from the President and building his own credibility.
Trump's inexplicable linking of U.S. interest rate policy with trade relations with America's largest trading partners has generated more confusion than market volatility. But the President's outlandish statement has instead given Federal Reserve Chair Kevin Warsh an opportunity: to drive a Fed rate hike this month, convincingly creating distance from the White House and boosting his own credibility.
Last Friday should have been a reasonably good day economically for the President. After all, U.S. August job growth came in three times higher than expected, and a significant portion of the summer's weak job figures were revised upward. Diesel prices did hit a record high earlier that day, potentially adding upward pressure on inflation. However, the modest wage growth in the jobs report could also be interpreted as another reason for the Fed to stand pat ahead of this Friday's inflation data, coming just days before the Fed's next meeting.
Trump needed some good economic news. With only two months until the midterm Congressional elections, his overall approval rating remains at the low point of his two terms, and 71% of Americans (including four in ten Republicans) disapprove of his handling of the cost of living.
Yet, instead of focusing on the positive August jobs data, Trump quickly and somewhat inexplicably pivoted to attack the Fed, telling the central bank what it should do and threatening what he would do if it didn't comply.
"High interest rates put the U.S. at a very unfair disadvantage, I won't allow it!" Trump wrote on his Truth Social platform, while praising Warsh as "great." "We should have the lowest interest rates in the world... No rate cut, I'll stop trading with those countries where we have a deficit," Trump added.
The main problem with this argument is that it simply doesn't make sense. Even commentators typically supportive of the President either gave up trying to parse it or ignored it outright. Given the market's concerns over the past 18 months about the President's persistent political pressure on the central bank—including his willingness to force its hand through political appointments—this apparent disregard is noteworthy.
Trump has repeatedly called for significant rate cuts during his second term and has threatened multiple times to fire Warsh's predecessor, Jerome Powell, for not complying. He has also frequently questioned why America's economic strength shouldn't also grant it the world's lowest interest rates, even though most economists would struggle with the notion that a high-growth economy should have lower borrowing costs—considering the inflationary impact of overheating, the opposite is typically true.
More importantly, with core inflation running above the Fed's 2% target for 65 consecutive months, growth accelerating, financial conditions loose, and full employment effectively achieved, almost no one believes the Fed should be cutting rates now—not even those who think a September hike (currently priced by futures markets at over a 50% probability) might be slightly premature.
Even if one agreed with the call for rate cuts now, despite the cost-of-living issues, linking the Fed's hesitation to a threat to "stop trading with foreign countries" has left most commentators and investors questioning the President's grasp of basic economics.
"Clueless" or "Puppet"?
Perhaps Friday's post was just a hasty attempt to re-energize his latest offensive in the trade tariff war. But even then, deliberately weakening foreign economies by cutting off imports via tariffs or executive order could prompt those countries to cut rates while also potentially raising import prices at home. That wouldn't give the U.S. the world's lowest interest rates.
The market's lack of reaction to Trump's latest Fed comments might indicate investors are growing more skeptical and cautious about the President's increasingly outlandish posts. For example, Trump recently claimed to have "blown to pieces" Iran's Kharg Island oil hub, which turned out to be completely false.
So where does this leave Kevin Warsh? The Trump-appointed chair has struggled to establish his own credibility since taking office in May, with concerns about White House political pressure constantly looming over him.
However, Warsh seemed to lean noticeably hawkish in his recent keynote speech at Jackson Hole.
A rate hike now would not only highlight the Fed's commitment to its inflation target (regardless of how little consumer price inflation trends fluctuate this week) but also affirm Warsh's control over the central bank and help him create distance from the President.
"A 25bp hike is good PR. It ends the credibility narrative and months of speculation over whether Warsh is a puppet," wrote TS Lombard economist Dario Perkins. He noted that in the last 50 years, only Janet Yellen didn't raise rates within two months of becoming Fed chair.
The perceived cost of the Fed and its current head being seen as cowed by a White House whose views are "hard to explain" outweighs any negative impact from a quarter-point hike. In fact, hiking now might even help lower long-term bond borrowing rates by reaffirming the Fed's inflation-fighting credibility, taking some pressure off Treasury Secretary Scott Bessent; and long-term rates arguably have a bigger impact on the economy than the policy rate.
"Warsh only gets credibility when Trump starts calling him an idiot!" Perkins added.
For now, Warsh still seems "great" in the President's eyes. But it took Trump only a year to go from praising Powell as "brilliant" to labeling him "clueless" as rates kept rising. Warsh faces significant choices, even if they risk angering the person who appointed him.
(These views are those of the author, Mike Dolan, a Reuters columnist.)
