United States: Fed rate hike, a cover for Donald Trump

The U.S. Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, 16 September, bringing the target range to 3.75–4.00%, marking the first increase since summer 2023. The decision, taken unanimously by the Federal Open Market Committee (FOMC), followed two days of deliberations focused on monetary policy. The move comes amid rising oil prices and escalating tensions in the Middle East, with the Fed signaling further hikes are likely in the coming months. President Donald Trump expressed disappointment with the decision, calling it “malheureuse” and criticizing the Federal Reserve for failing to align with his economic agenda. He had previously advocated for rapid rate cuts to stimulate growth ahead of mid-term elections in November. Trump had chosen Kevin Warsh, a former advisor, to lead the Fed, replacing Jerome Powell, whom he had publicly opposed. Despite his frustration, Trump reaffirmed his confidence in Warsh during a press briefing, stating, “Yes, completely.” In his statement, Fed Chair Kevin Warsh emphasized that the rate hike aims to help bring inflation back down to the 2% target. He acknowledged that financial conditions remain tight, noting that the committee broadly shares this view. “We’ve slightly reduced our accommodative stance,” he added, underscoring the Fed’s commitment to maintaining control over monetary policy. The decision reflects broader economic pressures, including the impact of Trump’s policies. Since the start of the conflict between the U.S. and Iran in February, gasoline prices have surged, costing American households an additional $108 billion, according to data cited by the Financial Times. Additionally, Trump’s trade policies and increased defense spending have contributed to inflationary pressures. These factors have reinforced the Fed’s need to maintain a restrictive monetary stance. According to new projections released by the Fed, 16 of the 18 members of the FOMC expect another rate hike before year-end, with some anticipating increases into 2027. By the end of the year, the federal funds rate could rise to 4.25%, keeping it elevated through late 2027. Inflation is projected to return to the 2% target only by early 2029, a delay of nearly a year compared to earlier forecasts. Economic analysts have noted that the Fed’s credibility remains intact despite political pressure. Diane Swonk, chief economist at KPMG US, stated that the Fed’s long-standing reputation for managing inflation is crucial. “We’re experiencing the longest period of inflation since the 1970s and 1980s,” she said. “No one wants to be in charge during such a pivotal moment, but Kevin Warsh is here, and he’s done his job.” While Trump has voiced criticism, he has not directly blamed Warsh. Instead, he has framed the situation as a strategic choice, arguing that replacing Powell with Warsh helped secure his electoral success. Some observers suggest that Trump may have attempted to influence the Fed’s decision, though there is no evidence of direct intervention. A Wall Street Journal columnist speculated that Trump might have tried to “foam the runway” for his preferred outcome. Market reactions were largely stable, with minimal changes in bond yields and a slight decline in equities. Investors appeared to accept the Fed’s decision as a necessary step toward stabilizing the economy, even as political tensions continue to shape the backdrop of monetary policy.