Fed Hikes Rates Again, Dashing Trump's Hopes for Cuts

The US Federal Reserve raised its benchmark policy rate target range by a quarter of a percentage point to 3.75%-4.00% on Wednesday, its first increase in more than three years. The move drew a combative response from President Donald Trump, who renewed his demand on social media for lower borrowing costs, calling for rates to be cut "for the United States of America, and fast."

Trump has pushed for a federal funds rate of 1% or lower. Barring an unforeseen catastrophe that forces the Fed to slash rates to zero, as it did during the global financial crisis and the COVID-19 pandemic, that is unlikely to happen during the remainder of his presidency.

Adding to the pressure, rates futures markets are now pricing in roughly a 50% chance of another hike at the Fed's next meeting in October, just days before the US midterm elections. Trump has said he has confidence in Fed Chair Kevin Warsh, but a further increase before voters go to the polls would be unwelcome. The president's approval ratings are already near their lowest levels, and polls suggest his Republican Party could lose control of the House of Representatives and possibly the Senate.

Many Fed-watchers had previously dismissed the possibility of an October hike, arguing the central bank would want to avoid any appearance of acting out of political motive. But after Wednesday's unanimous increase, upwardly revised rate projections and a hawkish press conference from Warsh, a move in October is now seen as very much on the table.

In their revised economic projections, Fed officials raised the median fed funds mid-range point outlook for the end of 2027 and 2028 by 50 basis points to 4.1% and 3.9%, respectively. Those projections still imply a slight easing of policy over the course of 2028, Trump's last full year in the White House before the January 2029 handover, but it is a close call.

Markets appear more convinced that US rates will need to stay higher for longer. Traders are pricing in a terminal rate — the peak of the hiking cycle — of around 4.60%, reflecting a combination of deficit and debt worries, lingering doubts over Fed independence and concerns about factors keeping inflation hot, including geopolitical conflict, energy price pressures and AI-related spending.

Warsh cited geopolitics as a key reason why inflation is sticky and bond yields are elevated. A major factor is the impact of reduced energy supply stemming from the Iran war. The onset of hostilities marked a clear turning point in the Fed's expected rate path. On February 27, the day before the US and Israel attacked Iran, SOFR rate futures priced in a fed funds rate of 3.13% at the end of 2028. By Wednesday's close, the same contract implied a policy rate of around 4.60%.

Before the war, traders were pricing in two rate cuts over the rest of Trump's presidency. They are now pricing in three hikes, on top of the one delivered on Wednesday — an extraordinary hawkish pivot. Economists at BNP Paribas wrote on Wednesday that they see upside risk to the length and size of the hiking cycle, adding that with policy starting from a stimulative stance, a strong cyclical impulse and persistent inflation, significant rate increases — perhaps more than the three they expect — may be necessary to stabilise the unemployment rate and prevent overheating next year.

Trump argued that rates should be slashed because the US is "the best credit in the world, by far." Most observers and experts, including Warsh, appear to disagree. The growing likelihood is that the Fed's 25 basis-point cut last December, under then-chair Jerome Powell, will be the last one Trump sees as president.