With higher rates now on the table, Warsh will have to either follow through this month with a rate increase weeks before the U.S. midterm elections, or risk being branded as inconsistent. The Fed also meets in late October, close to the election day, and closes out the year with a meeting in December.
Fed officials are adamant that election schedules do not factor into the policymaking process. But a rate hike this month or next could still be a difficult step, given Trump's expectations and the president's animosity towards the Fed.
When the central bank cut interest rates in September of 2024, members of the Trump campaign roundly criticized it as a political move by policymakers, including then-Fed chief Jerome Powell, to boost the Democratic Party's chances in the November presidential election.
The headwinds for Trump's fellow Republicans going into the upcoming November 3 vote are considerable, with the president's approval rating stuck at the lowest level of his career and voters constantly reminded of his failure to deliver on a promise to lower the cost of living.
The average price of gasoline in the U.S. is still above $4 a gallon, or about 40% higher than it was before the start of the U.S.-Israeli war with Iran in late February, and the average rate on a 30-year fixed-rate home mortgage has risen by more than half a percentage point in the last six months. Government debt yields, meanwhile, have been grinding higher to 20-year highs under Trump's watch.
The White House and Republican allies now worry a move by the Warsh-led Fed to lift borrowing costs would give Democrats one more weapon in their battle to wrest control of Congress and diminish Trump's power in the last two years of his second term in the White House.
A decision to hold rates steady again, however, risks breaking a central bank taboo against not following up words with appropriate action.
The challenge of staying consistent over time is one of the reasons to avoid "forward guidance," which Warsh argues ties the hands of policymakers and sets public expectations that may have to be changed. But ignoring guidance altogether has its own risk, with economic researchers arguing that the optimal approach is to avoid binding promises, while providing enough information and follow-up action that the public sees the central bank as committed to its inflation target.
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