President Trump’s campaign for lower interest rates in the U.S. faces another setback this week at the meeting of the Federal Open Market Committee (FOMC). Wall Street analysts have generally come to the conclusion that the FOMC will hold rates steady, if not hike them—and Trump’s own foreign policy is an underlying factor.
The FOMC, led by central bank chairman Kevin Warsh, will meet Tuesday and Wednesday of this week to discuss progress towards its targets of maximum employment and inflation at 2%.
It is the latter task that has caused the Fed some difficulty over the past few years. At the time of writing, inflation stands at 3.5%—a drop from May to June, but still elevated compared to the start of the year and the Fed’s target.
Part of that reading has come from higher fuel prices, up 15.7% from a year ago. While pressure in this category is beginning to fade (down 4.9% May to June), prices remain elevated as a result of conflict in the Middle East, choking global oil supply as a result.
There is little sign of a resolution between Washington and Tehran in sight. While the two sides are not currently engaged in active military conflict, as they have been over the past fortnight, no official ceasefire has been announced. While the fragile pause of fire allows space for diplomacy to proceed, neither side has indicated they will capitulate over control of the Strait of Hormuz—the key shipping lane in the movement of oil around the planet.
Trump’s foreign policy is therefore standing in the way of Warsh’s path to a cut—Wall Street analysts highlighted at the start of the week.
Bank of America’s base case is for a hold this month, wrote chief U.S. economist Aditya Bhave and his team: “With markets now pricing nearly 10 [basis points] of hikes in July, Chair Warsh faces a difficult choice. Not hiking could challenge the Fed’s credibility on inflation. But raising rates would go against his framework of looking through supply shocks.”
“We think July is Warsh’s call as he has enough votes either way. He has strategic incentives to hike soon. We still expect three 25bp hikes, in September, October, and December.”
The credibility question
Warsh’s—and by proxy, the Fed’s—credibility is at the heart of the scrutiny the central bank is currently under. Following President Trump’s unprecedented onslaught against Warsh’s predecessor Jerome Powell, politicians and analysts alike wondered what the Oval Office’s nominee for chairman would do once he was installed in D.C.
The key question was whether Warsh would advocate for the lower rate the president is angling for, even if the data suggests otherwise. So far, this hasn’t come to pass. But an aversion to hiking the base rate if appropriate to do so could similarly raise alarm.
While Warsh is keeping his cards now characteristically close to his chest (he is staunchly against forward guidance), EY-Parthenon’s chief economist, Gregory Daco, points out other policymakers are becoming emboldened.
“Chair Warsh’s communication void has encouraged other policymakers to speak more forcefully,” Daco wrote. “Their message has converged around a simple reaction function: after months of upside inflation surprises, patience is wearing thin. If inflation does not soon move back toward 2%, and remains elevated because of persistent supply shocks, stronger AI-related demand, tariffs, or the Middle East conflict, the case for additional policy firming will be clear.”
It seems the majority agree: According to CME’s FedWatch barometer, based on 30-Day Fed Funds futures prices, 68.5% of interest rate traders expect a hold at the meeting this week. The rest expect a 25bps hike to 3.75%-to-4%.
