The White House could not disguise just how big a blow this represented to Donald Trump.
“Rather unfortunate,” was how a White House spokesman on Fox News described the Federal Reserve’s decision to raise interest rates for the first time since 2023.
The quarter of a per cent hike by America’s central bank will make borrowing more expensive across America and comes just weeks before crucial midterm elections in which Republicans are expected to struggle.
President Trump, who hand-picked the new chairman of the Fed, Kevin Warsh, believing that unlike his predecessor Jerome Powell he would cut interest rates and juice the economy, was clearly disappointed – to put it mildly.
On Truth Social, he demanded that interest rates be cut to 1 per cent or less, but notably he did not mention Warsh directly – or call him dumb or a jerk, insults he regularly hurled at Powell. Instead he blamed the Fed’s board which was, he claimed, “very hostile, they’re very political”.
Since his return to the White House, Trump has repeatedly and aggressively demanded that the Fed slash borrowing costs. Warsh’s elevation to chair prompted serious concern that he would bow to the President’s demands, jeopardising the independence of what is considered the world’s most important central bank.
And Warsh must have been bracing for the President’s wrath.
Trump continued with his tirade, demanding that interest rates be lowered “fast”. Trump said that the benchmark interest rate should be lowered to “1 per cent or less because we are the Best Credit in the World – BY FAR”.
US Federal Reserve Chair Kevin Warsh discusses the interest rate raise yesterday at Federal Reserve Headquarters in Washington DC (Photo: Chen Mengtong/China News Service/VCG via Getty Images)Yet the brooding President Trump is unlikely to let the matter rest there. Earlier in September, he went so far as to threaten to cut off trade with countries with which the US has a trade deficit if the Fed did not lower interest rates. On Wednesday, the President was back at it, posting: “If we stopped Trading with every country that we have a Deficit with, which is most of them, we would make, at least, 1.5 Trillion Dollars a year.” He went on: “The word ‘Deficit” is nothing more than a fancy word for LOSS. We are ‘carrying’ almost every country in the World, and that cannot go on any longer.”
That’s Trump economics for you. An obsession with trade deficits, tariffs, and low interest rates. The President argues that the country is BOOMING. In which case, most economists (critically, including the Federal Open Market Committee which sets interest rates) believe that cutting rates to 1 per cent would only stoke inflation.
But rising inflation as a result of Trump’s own decision to launch military action in Iran meant the Federal Open Market Committee had little choice but to raise rates.
“The plain fact is that inflation is too high and has been for too long,” Warsh stated – an uncomfortable truth for a White House which blames President Biden for everything and ignores the fact that high energy costs resulting from the war with Iran are stoking inflation. He added that central banks elsewhere were increasing interest rates in response to the global turmoil and rising oil prices.
Warsh is now at odds with President Trump, which may prove an awkward place to be. And this interest rate hike is unlikely to be the last this year. By increasing the costs of borrowing, the Fed has undercut the White House claim that inflation is not a concern.
Warsh ducked questions from reporters about his relationship with the mercurial President Trump at a press conference following the decision. “I’ve got nothing for you,” he said, refusing to be drawn.
Yet Warsh is dealing not with the world of political optics where Trump dwells but with the harsh reality of the bond markets, which deal in US government debt. The bond markets loathe inflation, because bonds pay a fixed amount of interest and rising prices make the bonds they are holding worth less. Thus, the bond markets gave Warsh a hard time in July when he seemed to waffle over how the Fed was going to curb inflation. Warsh’s move on Wednesday showed the bond markets that he really is an inflation hawk. The reaction was negative anyway – stocks fell and yields on bonds rose. But that is normal when the Fed raises rates and signals that inflation remains a concern. So in that sense, Warsh passed a crucial test and reassured markets that the US Federal Reserve is not the President’s poodle. Investors can breathe a sigh of relief that the independence of the US central bank is still intact, at least for now.
Trump is left facing the reality that it is his policies which have made prices more expensive. A trade war with Canada. Fuels costs jacked up by the war with Iran which is now destabilising the region – with renewed conflict between Saudi Arabia and the Houthis threatening another critical waterway used for shipping energy. And Government debt is increasing due to tax cuts and a failure to rein in spending.
The President’s right that the economy is in good shape – but solid economic growth and the AI investing boom are putting more upward pressure on prices. Voters will be in a sour mood when they head to the polls in November for the midterm elections that will decide which party controls Congress, because everything from groceries to gas is expensive. Two years ago, the electorate punished Democrat Kamala Harris for the high cost of living, which remained elevated after Covid, and elected Trump. Now it’s his economy.
Trump told reporters he spoke to Warsh just before the US Federal Reserve Open Market Committee unanimously voted to raise interest rates. “I’m relying on Kevin,” the President replied, when asked if he had confidence in Warsh, “but he has a very tough board.” Trump added, “I said ‘do what you want’.”
Yet few believe the President will end his campaign for lower interest rates. Fears about the eroding political independence of America’s central bank have been allayed for now. But let’s see how long it will be before Warsh is on the receiving end of hostile Truth Social posts from the man who hoped he would cut rates.
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