FUTURES markets now price an 85 percent probability of a rate increase at the Federal Reserve's Sept. 15-16 meeting, following a Friday consumer price report showing core inflation accelerated faster than expected in August.
The probability sets up a direct collision between Federal Reserve Chair Kevin Warsh, who took office in May, and President Donald Trump. Warsh must contain elevated inflation while facing relentless White House pressure to cut rates. Trump has repeatedly demanded rate cuts, recently threatening to intensify trade wars if monetary policy is not eased, and reiterated Sunday that U.S. borrowing costs should rank lowest globally. When asked whether he expected a rate increase, Trump said, "I don't know."
Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund, said Warsh is in a "no-win situation." Obstfeld said Warsh risks either attracting presidential anger or losing credibility in markets, with potential for more severe inflation consequences in the future. Obstfeld added that Warsh does not want to be remembered as the Fed chair who yielded to government pressure when the central bank's mandate was at stake.
The timing intensifies the stakes. Mid-term elections approach, and voter dissatisfaction with the rising cost of living is growing. Lower interest rates, even if delayed in their impact on mortgages or credit cards, could provide Trump a basis to signal economic relief is forthcoming and deflect administrative blame.
White House officials have sent conflicting signals on how Trump would respond to a hike. On Friday, Director of the National Economic Council Kevin Hassett told Bloomberg TV that Trump still wanted interest rates to fall.
