Trump is pressuring the Federal Reserve to cut interest rates, but Warsh may do the opposite: next week's meeting presents a "three-way choice" scenario.

As Trump continues to pressure the Federal Reserve to cut interest rates, new Chairman Warsh may face a difficult policy choice next week.

In a recent analysis, Bloomberg columnist Claudia Sahm argues that the key issue now is no longer whether to raise or lower interest rates, but whether the Federal Reserve can maintain its policy independence amidst political pressure and inflation risks. He believes that as the risk of inflation rising again and remaining high for an extended period increases, raising interest rates may once again become a viable option.

As previously mentioned in a Wall Street Journal article , on September 4th, Trump again called on the Federal Reserve to cut interest rates, claiming that high interest rates put the US at an "unfair disadvantage" and demanding that the Fed and its "excellent new leader" be "patriotic" this time. Meanwhile, US inflation remains significantly above the 2% target, and the market currently expects a roughly 60% probability of a rate hike at the September 16th meeting.

Against this backdrop, analysts say the Federal Reserve faces roughly three policy paths next week, and different choices will not only affect interest rate trends but may also further influence market perceptions of Warsh's leadership and the Fed's policy independence.

Scenario 1: The Federal Reserve raises interest rates unilaterally without Warsh's support.

With several voting members clearly favoring a tighter policy stance, the possibility of a "hawkish alliance" emerging within the Federal Reserve cannot be ignored.

In the previous decision to keep interest rates unchanged, three voting members—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan—voted against raising rates. Subsequently, Governors Lisa Cook, Michael Barr, and Christopher Waller also indicated they would remain open to potential policy tightening based on data changes.

According to Bloomberg, Jim Bianco of Bianco Research pointed out that former Chairman Jerome Powell has remained silent since stepping down. Powell previously chose to remain on the Federal Reserve Board to maintain the institution's independence, leading to speculation that he might join the hawkish camp and support interest rate hikes at a crucial moment.

However, if the committee ultimately votes against the chairman's position, the public disagreement between Warsh and the majority of members will be an extremely rare situation in the modern history of the Federal Reserve. Market doubts about the policy direction may intensify as a result, and further exacerbate volatility in the interest rate market and bond yields.

Scenario 2: Remaining inactive inevitably raises suspicions of "political interference".

Holding back may seem like a safe bet, but the cost is equally high.

If the Federal Reserve keeps interest rates unchanged at 3.5% to 3.75% before the November 3 midterm elections, it is likely to be interpreted as being influenced by political pressure , and Trump's recent public statements will be the most direct evidence of this. Claudia Sahm points out that "appeasement is not an effective strategy for Trump," citing Barr as an example: the latter resigned in an attempt to ease tensions, but failed to alleviate the pressure.

Market history also shows that investors have limited tolerance for excessively loose policies. From the time the Federal Reserve started its rate-cutting cycle at the end of 2024 to January 2025, the yield on 10-year US Treasury bonds rose by approximately 115 basis points. After the Federal Reserve stopped raising rates in 2023, the market also sold off US Treasuries again due to doubts about the insufficient pace of rate hikes.

More importantly, current inflation does not support a pause. The PCE inflation rate is 3.7%, significantly higher than the 2% target, and the cooling process has stalled since the end of 2024, with more than half of the PCE sub-indices still rising at an annualized rate of over 3%.

Whether attributing inflation to the energy shock from the Middle East conflict or the soaring prices of computer equipment driven by the AI investment boom, it's difficult to conceal the reality that some of the shocks are evolving into persistent pressures. Maintaining public confidence in price stability remains an inescapable responsibility for the Federal Reserve.

Scenario 3: Walsh leads the interest rate hike, defending public trust through action.

The path with the highest market probability, and considered the "least bad option," is the interest rate hike led by Warsh.

Walsh's speech in Jackson Hole last month was widely interpreted as a strong hawkish signal. He stated explicitly, "We must be convinced that underlying inflation is moving toward our target at a clear and sufficiently rapid pace... otherwise, we still have work to do." Given the current inflation situation, this statement provides a policy basis for raising interest rates.

However, putting this into action requires considerable political courage. Trump has forcibly linked interest rate policy with trade policy and threatened to cut off trade with countries with trade deficits if the Federal Reserve does not cut interest rates. The White House's possible response includes further legal pressure and the introduction of a new round of economic intervention measures.

Nevertheless, from the perspective of maintaining long-term institutional credibility, raising interest rates may still be a more reasonable option. If the Federal Reserve abandons inflation control due to political pressure, the credibility it loses in the bond market could be far more severe than the criticism it faces from the White House.

Risk Warning and DisclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.