Trump's baffling Fed threat hands Warsh a credibility opening
Trump's odd demand linking Fed rates to trade deficits could let Fed Chair Kevin Warsh bolster his credibility by backing a rate hike this month.
President Donald Trump's latest intervention on Federal Reserve policy has left economists and investors puzzled, but it may inadvertently hand Fed Chair Kevin Warsh an opportunity to establish his independence from the White House.
Friday's August jobs report was strong, with payroll gains triple forecasts and upward revisions to earlier months. Yet Trump quickly pivoted from the good news to attack the Fed, posting on Truth Social that high interest rates put the US at an unfair disadvantage. He demanded the lowest rates in the world and threatened to halt trade with countries running deficits against the US unless the central bank complied.
The logic of linking domestic interest rates to bilateral trade balances is difficult to follow. Analysts noted that cutting off imports would likely weaken foreign economies, pushing their rates lower, while raising import prices at home — hardly a recipe for achieving the world's lowest borrowing costs.
Markets largely shrugged off the comments, possibly reflecting growing scepticism toward presidential statements after recent unverified claims. But the episode underscores the political pressure that has shadowed Warsh since he took office in May.
Warsh signalled a hawkish tilt in his recent Jackson Hole speech. A quarter-point rate hike at this month's meeting would reinforce the Fed's commitment to its inflation target and demonstrate that policy decisions are not dictated by the White House. Economists noted that nearly every Fed chair over the past 50 years raised rates within two months of taking office, making inaction itself a potential credibility risk.
With core inflation having run above target for over five years and growth solid, most observers see no case for cuts. A hike now could also help lower long-term bond yields by reasserting the Fed's inflation-fighting credentials.
Trump has praised Warsh as "great" — the same language he once used for predecessor Jerome Powell before turning on him. History suggests the president's patience with an independent-minded Fed chair may be short, leaving Warsh with a significant choice about whose confidence he values more.