President Donald Trump berated Jerome Powell for years as he sought to pressure the then-Federal Reserve chairman to cut interest rates. So far, he’s given a pass to the new Fed chief, Kevin Warsh, whom Trump nominated earlier this year.
Now, not even four months into Warsh’s tenure, the honeymoon might be over. The president has ratcheted up his calls for an interest rate cut in recent weeks, setting the stage for a potential showdown after Wednesday’s decision from Fed policymakers.
Warsh faces a “time to choose,” as economists at UBS put it: Will the Fed hold its key rate steady yet again in the face of rising inflation, or will the central bank increase the rate to battle stubbornly high prices — and potentially enrage the president?
Trump adviser Kevin Hassett, chair of the National Economic Council, said he thinks the “president will have something to say about it” if the Fed makes a “big move” with rates. (Hassett was a candidate for the Fed job before Trump picked Warsh.)
“The president will have an opinion about it,” Hassett told CNBC on Friday. “I’m sure he believes that there’s plenty of room for interest rates to go down, and he voices that opinion while respecting the independence of the Fed.”
The Fed has not raised interest rates since 2023, when Joe Biden was president and the economy was contending with sky-high inflation. But market odds for an interest rate increase Wednesday were at more than 90% as of Tuesday, after inflation data for August came in hot at a 3.4% annual clip. The Fed’s target for inflation is 2%.
‘Just do your own thing’
When Warsh took office in May, Trump said he wanted the new central bank chairman to just focus on the job.
“Don’t look at me, don’t look at anybody, just do your own thing and do a great job,” Trump said at the time. This was a stark contrast with the insults Trump hurled at Powell, whom the president nominated to be Fed chair during his first term.
Trump hasn’t insulted Warsh, but he has become more vocal about his desire for a rate cut, once again raising questions about the Fed’s independence.
“I’d love to see lower interest rates,” Trump said in a July 29 White House event. Trump said Warsh was “fantastic,” but claimed the Fed’s board was “political” and “they want to keep rates up.” Trump again brought up rates in August, saying: “We would really like to see interest rates come down.”
Earlier this month, Trump went even further. “We should be paying the lowest interest rate in the world,” Trump said on Sept. 4, following the consumer price index report that showed inflation wasn’t slowing down. Trump complained that higher rates cost the country more on its debt. “We should be at 1% or a half a percent,” he said. “We shouldn’t be at 4%.”
Trump continued later in a social media post, “A STRONG COUNTRY MEANS A LOWER INTEREST RATE.” The social media post ended: “High interest rates put the U.S.A. at a very unfair disadvantage, and I won’t allow that to happen!”
The inflation situation
There are several factors stoking inflation.
Deutsche Bank analysts noted that “forward-looking elements of the inflation picture” have gotten worse. “Recent minutes to FOMC meetings showed the Committee is focused on three forces in particular — energy, tariffs / supply chains, and AI. At least two out of three of these factors points to more elevated inflation pressures” than the Fed faced at its July rate-setting meeting, they wrote.
Since then, the Trump administration entered a potentially protracted trade war with Canada, which was America’s second-largest source of imports last year. Energy prices have soared back to near all-time highs. On Tuesday, U.S. crude oil touched $106 per barrel and international Brent crude oil traded around $109 per barrel. Gasoline prices remain 45% higher than February, when the war with Iran started. Diesel prices have reached their highest level ever, putting pressure on farmers and truckers who rely on the fuel.
“The cost of diesel gets into just about everything,” KPMG chief economist Diane Swonk recently told NBC News.
The expansive AI data center buildout has fueled economic growth while also pushing some supply chains to their breaking point. In Friday’s inflation reading, data showed the price of computer software, accessories and related items rising 25.4% over the last year — the category’s largest increase on record. Consumer technology companies from Apple to Xbox to Amazon have raised some prices as a result.
A rate hike carries risks of its own, according to economists, including Moody’s Mark Zandi. The labor market, for one, is solid, if not spectacular. The unemployment rate is 4.1%, according to August jobs data released earlier this month.
While inflation is high, the effects of Trump’s tariffs and energy shocks from the Iran and Ukraine wars should fade without any help, Zandi wrote on LinkedIn. So, given the current economic circumstances, if the central bank hikes, “it must push growth below potential, and that is hard to do without layoffs, rising unemployment, and igniting a self-reinforcing negative cycle,” he added.
Tech companies are shelling out hundreds of billions of dollars to buy equipment, build massive data centers and hire developers to support their AI ambitions, while corporations have reaped major profits. The average American, though, has seen wage growth slow to an annual rate of 3.1%, lagging the pace of inflation.
“The challenge is even more complicated because AI-related investment appears to be powering the economy, while the non-AI economy is already struggling,” Zandi said.
