"High interest rates put the U.S.A. at a very unfair disadvantage, and I won't allow that to happen!" Trump wrote on his Truth Social site, while extolling Warsh as "great". "We should have the LOWEST RATE of any country in the World ... LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT," Trump added.
The main problem with this argument is that it makes no sense. Even commentators typically supportive of the president either gave up trying to work it out or just ignored it altogether. This apparent dismissal is somewhat remarkable given the market's concern over the president's relentless political pressure on the central bank over the past 18 months, including his willingness to use political appointments to force it onside.
Trump has repeatedly called for sharp interest rate cuts throughout his second term and threatened to fire Warsh's predecessor Jerome Powell on numerous occasions for not doing so. He has also regularly questioned why America's economic strength should not also see it have the lowest interest rates in the world, even though most economists would balk at the idea that borrowing costs should be cheaper for a fast-growing economy - it would typically be the other way around given the inflationary implications of a go-go economy.
More importantly, with core inflation above the Fed's target 2% now for 65 straight months, growth quickening, financial conditions loose and full employment effectively still in the bag, virtually no one thinks the Fed should be cutting rates right now. Even those who think that the September rate hike, that's currently more than 50% priced into futures markets, may be a tad premature.
Even if you agree with the call to lower interest rates now, despite the cost of living issues, linking the Fed's hesitation to do so with a threat to halt trade with foreign countries left most pundits and investors questioning whether the president had a grip on the basics.
Perhaps Friday's post was just a hurried way of reintroducing the latest salvo in Trump's trade tariffs campaign. But even then, deliberately weakening foreign economies by cutting off their imports via tariff or decree would likely push them to lower interest rates while also potentially spurring import prices higher stateside. And that won't deliver America the lowest interest rates on the planet.
The lack of market reaction to Trump's latest Fed jibe may indicate that investors are becoming more sceptical of and circumspect about the president's more outlandish posts. Trump's recent claim to have blown Iran's Kharg Island oil hub "to smithereens" turned out to be plainly false, for example.
So where does this leave Kevin Warsh? Trump's appointee has struggled to establish his own credibility since taking office in May, as concerns about political pressure from the White House have dogged him.
However, Warsh seemed to lean decidedly hawkish in his recent keynote speech in Jackson Hole.
Delivering a rate rise now would not only underscore the Fed's commitment to its inflation target, regardless of small moves in this week's consumer price inflation trends, but it could also confirm Warsh's control of the central bank and help distance him from the president.
"One 25bps hike is good PR. It kills this credibility narrative and ends months of speculation about whether Warsh is a sock puppet," wrote TS Lombard economist Dario Perkins, pointing out that over the past 50 years, only Janet Yellen did not lift rates within two months of taking over as Fed chair.
A perception that the Fed and its current boss are being cowed by a White House with "difficult to explain" views is greater than any downside from a quarter-point hike. Indeed, a hike now may even help bring down long-term bond borrowing rates, which arguably have a greater economic impact than the policy rate, by re-asserting the Fed's inflation-fighting credentials and taking some of the pressure off Treasury Secretary Scott Bessent.
"Warsh will be credible when Trump starts calling him an idiot!" Perkins added.
For now, Warsh still seems to be "great" in the eyes of the president. But it only took Trump a year to go from praising the "considerable talent" of Powell to branding him "clueless" when rates continued to climb. Wash has big choices to make - even if they do risk the ire of the man who appointed him.
TLT•
