To add insult to injury, the rates futures market is now pricing in a roughly 50% chance that the Fed could raise rates again at its next meeting in October, only days before the U.S. midterm elections.
Trump insisted on Wednesday that he has confidence in Fed Chair Kevin Warsh, but it's safe to say he would not welcome another hike just before voters go to the polls. The president’s approval ratings are already near the lowest in his presidency, and polls suggest his Republican Party could lose control of the House of Representatives and possibly the Senate, too. Another notch higher in borrowing costs might help ease voters' concerns over inflation, but Trump is unlikely to see it that way.
Many Fed-watchers had previously dismissed the possibility of an October hike, arguing that the Fed — and Warsh in particular — would want to avoid any appearance of acting with a political motive.
But given Wednesday's unanimous rate hike, the upwardly revised rate projections from Fed policymakers and Warsh's surprisingly hawkish press conference, a move in October is now very much on the table.
Higher for longer
Will Trump see another rate cut before he leaves the White House?
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 bps to 4.1% and 3.9%, respectively.
These broad 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 to his successor. But it's a close call.
But markets appear much more convinced that U.S. rates will need to be kept higher for longer. Traders are now pricing in a "terminal rate" — the peak of the hiking cycle — of around 4.60%. That's likely down to a combination of deficit and debt worries, lingering doubts over Fed independence and concerns about the factors keeping inflation hot, namely geopolitical conflict, energy price pressures, and AI-related spending.
Whatever the cause, the message is clear: Markets expect that rates aren't coming down over the next two years. And that's not what Trump wants to hear.
TLT•
