"New Fed Watch": Warsh's rate hikes have "no turning back," and Trump's "trust" is being tested.

Last year, Trump pressured the Federal Reserve to cut interest rates, but now the chairman he personally selected is being pushed to the brink of raising rates by the market.

On September 14, Nick Timiraos, the “new Fed mouthpiece,” published an article in the Wall Street Journal, stating that Federal Reserve Chairman Kevin Warsh is about to face a crucial decision: whether to announce an interest rate hike at this week’s policy meeting, given persistently stubborn inflation and rising energy prices.

Timiraos believes that Warsh's series of statements over the past few months have left him with almost no room to remain inactive. The better-than-expected August CPI data has completely sealed off his last escape route. Meanwhile, the White House's attitude is ambiguous—it verbally says it "100% respects independence," yet hints that it "won't be too happy" about interest rate hikes.

With only seven weeks left until the US midterm elections, if Warsh chooses to raise interest rates, it will directly test the "trust" Trump has expressed for months. But if he doesn't raise rates, how will Warsh's credibility be maintained? Previously, Warsh maintained a balance between the White House and the Federal Reserve by using the tactic of "speaking less and avoiding provocation," but after this meeting, silence will no longer be a shield.

How did Walsh back himself into a corner?

After taking over as Federal Reserve Chairman in May, Warsh delivered a strong anti-inflation signal at his first press conference in June, leading the market to expect even more aggressive action. However, at the subsequent policy meeting, he chose to keep interest rates unchanged, without providing a convincing explanation—why did policy stagnate after such a hawkish stance?

As a result, long-term interest rates rose instead of falling during his speech. Nick Timiraos wrote in an article that this signaled "investors' uncertainty about whether his hawkish rhetoric would translate into actual policy."

In August, Warsh attempted to correct this impression in a keynote speech. He stated that "there is little evidence that lending conditions are suppressing the economy," and that the better inflation data in the summer did not convince him that the underlying trend had improved. These remarks were, in effect, paving the way for an interest rate hike.

But what truly "closed the last door" was the September CPI data. Nick Timiraos wrote, "The key consumer price indicator rose more than expected in August, breaking the improvement momentum of the previous two months," which had been an initial confirmation of the Fed's own forecasts. After the data was released, the market's bet on a rate hike this week quickly rose to about 90%.

More importantly, the data fell within the Fed's pre-meeting "quiet period," leaving no official able to "cool things down." With the September 17th policy meeting fast approaching, Warsh's options are becoming increasingly limited.

What's hidden behind the White House's "100% support"?

Just ahead of this week's meeting, White House National Economic Council Director Kevin Hassett stated publicly on television on Sunday that inflation is improving and the Federal Reserve does not need to raise interest rates. He also emphasized that Trump "100% respects Kevin Warsh's independence" and will "100% support" any decision made by the Federal Reserve.

These words sounded respectable, but Hassett immediately added: Trump "wouldn't be too happy" about raising interest rates.

He also argued that the Federal Reserve's adjustment of interest rates so close to the election would "damage its reputation for staying away from politics." Nick Timiraos offered a reverse interpretation of this statement in his article: if the White House publicly calls for rate cuts, and the Federal Reserve chooses to hold rates steady when the market widely expects a rate hike, it would similarly raise suspicions that Warsh was pandering to the president who appointed him.

In other words, no matter who Warsh chooses, there will always be people who question his motives. This is precisely the core dilemma of the Federal Reserve's independence.

Trump and the Federal Reserve: From "War" to "Ceasefire"

Last year, Trump launched what he called the most sustained public pressure campaign against the Federal Reserve in decades. He relentlessly attacked former Chairman Jerome Powell, even threatening to file a fraud lawsuit against him. He placed economic advisor Stephen Miran on the Fed's board of directors, who voted for accommodative policies in all six meetings he attended. Trump also attempted to remove Fed Governor Lisa Cook—the first attempt by a president to fire a Fed governor—which ultimately failed due to Supreme Court intervention, but the case remains unresolved.

Warsh's arrival temporarily ended this "war." Trump's repeated statements that he "trusted Warsh to do the right thing" allowed Warsh to avoid the kind of public attacks that Powell suffered.

But Nick Timiraos points out that this "ceasefire" is conditional. Raising interest rates seven weeks before the election will directly test how long Trump's "trust" can be maintained.

It's worth noting that Warsh himself publicly criticized the Federal Reserve last year for being too slow in cutting interest rates. When asked if this stance was influenced by the president who might nominate him, he responded on CNBC: "Birds molt at their own pace, and it's all about timing. This has nothing to do with the president."

Walsh's stance: Independence, or isolation?

Despite various speculations from the outside world, Walsh himself has consistently emphasized independence in his public statements.

"They selected an independent person to do an independent job, which is exactly what I planned to do," Walsh said during his congressional testimony this summer.

Nick Timiraos also revealed a detail in his article: people who had spoken with Warsh said that Warsh believed the Fed under Powell made things worse by making some "unnecessary confrontational statements"—such as publicly describing how tariffs drive up prices or publicly defending the Fed's independence. Warsh's strategy was "to speak less and avoid provocation."

This low-key approach has, to some extent, maintained peace with the White House. But if an interest rate hike is indeed announced this week, silence will no longer be a shield.

What do economists think?

The economics community is not united in its views on this interest rate hike.

Former Congressional Budget Office director and Republican economist Douglas Holtz-Eakin offered a rather direct assessment. He stated that before July, he didn't believe Warsh would risk antagonizing the White House before the midterm elections. However, since July, Warsh's pronouncements, coupled with the economic situation shaped by the energy shock and the AI boom, have left him "nowhere to stand."

“His hand was forced to play,” Holtz-Ekin said. “Kevin Walsh is a great politician, and he has to figure out how to handle this.”

He also predicted possible future developments: Trump and Warsh could tacitly agree for Trump to publicly attack Warsh, while Warsh silently endures it; or Trump could simply change the subject and pretend nothing happened. "Trump will change the subject rather than confront him directly because he can't admit he made a mistake," Holtz-Ekin said.

However, Michael Strain, a conservative economist at the American Enterprise Institute (AEI), holds a different view. He believes that interest rates should have been raised in July, but since they weren't then, it's inappropriate to act now, just weeks before the election.

“The unfortunate reality for the Fed is that it cannot ignore the fact that President Trump is extremely hostile towards this important institution,” Strain said. He believes that investors will digest the “wait-and-see” approach much faster than the Fed recovers from its conflict with Trump.

Future Direction: After the Armistice

How resilient is the Federal Reserve's principle of independence in the face of political pressure?

The article points out that adjusting interest rates before and after elections is not unprecedented—the Federal Reserve has done similar things before the 1988 political convention, in 1994, 2004, 2018, and in 2022 during Biden's presidency. Historically, the intersection of monetary policy and election cycles is not uncommon.

However, the current situation is unique because Trump's hostility towards the Federal Reserve is well documented, and every move Warsh makes is being magnified and analyzed.

Holtz-Ekin's assessment is perhaps the most pragmatic: regardless of the outcome, Walsh needs to demonstrate that he makes decisions based on economic data rather than political pressure.

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