How Warsh raised interest rates without angering Trump.

The first real policy clash between the Federal Reserve and the White House in three years ended with an unexpected calm.

The Federal Reserve announced its first interest rate hike in three years on Wednesday, but Trump's response was surprisingly mild. This contrasts sharply with his months-long attacks on the Fed's interest rate policy and is the most direct manifestation of Fed Chairman Warsh's efforts to reshape the relationship between the central bank and the White House since taking office in May. Instead of launching an offensive, Trump portrayed himself as the one who proactively "gave way," claiming that after speaking with Warsh beforehand, he said, "You might as well vote with the committee, because the result won't be any different."

Behind this rare situation lies a much closer personal relationship between Warsh and Trump than that between Warsh and his predecessor, Powell. According to Bloomberg and the Wall Street Journal, Trump called Warsh days before the Federal Reserve meeting, and the conversation extended from private pleasantries to expectations of interest rate hikes. At the Ned private club in Washington, several government officials watched Trump's remarks on their phones that evening and were visibly relieved that he hadn't publicly criticized Warsh. However, doubts remain about whether this fragile balance can be sustained, both in the markets and policy circles.

Telephone Call: Reconciliation or Intervention?

According to a senior White House official, Trump contacted Warsh several days before the Federal Reserve meeting. The call initially began in a friendly, nostalgic manner before shifting to expectations of interest rate hikes. This call was previously unknown to many of the president's core advisors—some senior officials only learned of it when Trump mentioned it to the media in North Carolina on Wednesday.

Trump subsequently characterized the rate hike in public as "a rate hike targeting Trump," portraying himself as someone who knew he couldn't stop it but still acquiesced, claiming that Walsh was facing a "very tough, anti-White House" committee.

Warsh declined to discuss any conversations with Trump at the press conference. He characterized the rate hike as the result of the Federal Reserve's own deliberations, calling it "a prudent, serious, and responsible decision that I have been preparing for and considering since taking office in May." He emphasized that his decision was based on economic conditions, not political pressure. White House spokesman Kush Desai stated that Trump "has repeatedly reassured his trust in Warsh" while reserving the right to comment on policy.

Relationship Management: Warsh's Strategies and Powell's Lessons

Compared to his predecessor Powell, Warsh chose a drastically different path. According to those who had contact with Warsh, he was confident in his ability to act according to economic needs while managing his relationship with the president in a way that avoided direct confrontation. He deliberately avoided any statements that might drag the government into internal disputes within the Federal Reserve and positioned central bank independence as a principle that needed to be "put into practice rather than publicly declared."

Powell's situation contrasts sharply with Trump's. His honeymoon period following the Fed's first rate hike in 2018 lasted only about five months, after which Trump's attacks escalated. While Powell answered the president's calls, he maintained a distant attitude, neither actively seeking to cultivate a relationship nor acting as Trump's economic advisor. Trump interpreted this as a confrontational stance.

Former Federal Reserve advisor and current Duke University professor Ellen Meade believes that in the current environment, maintaining the Fed's independence may require "managing the president" rather than "distancing oneself from him." She suggests that informing the White House in advance of unfavorable news and avoiding Trump's immediate outburst after policy announcements could be a viable strategy. However, she also draws a clear line: providing advance notice is one thing, actively seeking the president's "approval" is quite another, the latter fundamentally undermining the central bank's independence. She also frankly admits, "I don't think Warsh could do this job the way Powell does."

Historical precedents: The Greenspan model and its risks

Warsh's path is not without historical precedent. Former Federal Reserve Chairman Alan Greenspan served four administrations, maintaining close relationships with each president and their advisors while remaining independent in his policy decisions. In 1992, he broke with the Bush administration—the latter publicly criticized the Fed for its slow pace of interest rate cuts and partly blamed Greenspan for his re-election defeat, famously stating, "I reappointed him, and he disappointed me."

However, Warsh's situation carries additional political risks. Former Federal Reserve advisor Meade warned that if the White House perceives the rate hikes as "imposed" on Warsh rather than a decision he initiated, it could encourage the government to further pressure other Federal Reserve officials.

The Trump administration attempted to fire Federal Reserve Governor Lisa Cook last year, though the Supreme Court blocked the attempt this summer. However, reports indicate the White House has recently taken steps to prepare for another attempt. Some within the Federal Reserve are also uneasy about the upcoming investigation report on the collapse of Silicon Valley Bank, fearing its conclusions might be used by the White House as grounds for firing former Vice Chairman for Supervision Michael Barr.

Disagreements remain: Warsh's leadership is being questioned.

Even without a direct attack from Trump, Warsh still faces criticism from within the president's inner circle. Trump's trade advisor, Peter Navarro, stated in an interview that he "tried to understand why Warsh would make such a decision that defied historical precedent and fundamental economic logic." Navarro added that Warsh could have carried out the president's wishes in a "better way," such as "signaling in a statement that he preferred not to raise rates and was simply following the committee's lead."

Michael Strain, an economist at the American Enterprise Institute, characterized Trump’s account of the call as a “face-saving statement” and argued that the suggestion that Walsh could not lead his committee was “both absurd and untrue.”

Trump's statements have also raised concerns among market investors about a core issue: Is Warsh leading the Federal Reserve, or is he being led by it? A warning from a senior government official has added further uncertainty to this situation: if the Fed raises interest rates again in October—just before the midterm elections—Wash will face even greater scrutiny from Trump and his advisors.

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