Trump turns up the heat on Warsh as Fed rate hike looms

Ten days ahead of a meeting in which the Federal Reserve will likely consider raising interest rates, the Trump administration looks to be in a full-court press to halt the hike in its tracks.

In the past week, the president, vice president, Treasury secretary and one of the president's senior economic counselors have all urged the Fed not to raise rates and, in some cases, to cut them — an unusually broad public pressure campaign even by the standards of Trump's long-running criticism of the central bank.

While President Donald Trump has avoided directly criticizing his new Fed chairman Kevin Warsh, as he did former chair Jay Powell, he escalated the pressure Friday by threatening to halt trade with countries that run trade surpluses with the U.S. unless the Fed cuts interest rates. Trump had never before directly threatened tariffs if the Fed didn't lower rates.

The president's post was followed by an interview that senior economic counselor Peter Navarro gave to former Trump advisor Steve Bannon on Friday in which he warned that a rate hike would be "careless" and "would hit precisely the sectors America needs to prosper most." He called the members of the rate-setting Federal Open Market Committee "clowns" and said Warsh is trying to "do the right thing."

Earlier in the week, Vice President JD Vance said, "We believe that the Fed should be lowering interest rates." He added, "We're doing a lot of things to try to keep those interest rates down, but it would be nice to have some help from the Federal Reserve."

And Treasury Secretary Scott Bessent, in a CNBC interview, noted that the Fed typically doesn't raise rates during a supply shock until there are second- or third-order inflationary effects. The administration's pressure comes at a difficult time for Warsh. Markets are barely pricing in a rate hike for the Sept. 15-16 meeting, at about 60% probability, bolstered somewhat by a strong jobs report Friday.

The meeting comes just two months before the November midterm elections, in which polls show the administration faces widespread voter dissatisfaction with higher prices and interest rates. But questions also remain about the effect the Trump administration's pressure campaign will have on Warsh.

The Wall Street Journal reported last month that Trump talked to Warsh repeatedly, a report publicly backed by several of his aides. However, the president himself denied it, saying he had spoken only once to Warsh while in office.

Warsh himself has said the president has had no impact on his decisions and, in July congressional testimony, cited the Fed holding rates steady and not cutting as evidence of the central bank's independence. At the same time, Warsh has said that the president and other politicians have a right to comment on Fed policy.

In May 2019, during Trump's first term, Vice President Mike Pence, Treasury Secretary Steve Mnuchin and economic advisor Larry Kudlow all weighed in on the need for the Fed to consider cutting rates. The Fed did not immediately respond to that pressure but did end up cutting rates two months later.

The administration's argument was similar: Growth itself does not cause inflation, and additions to the supply side of the economy through tax cuts and strong capital investment expand the economy's capacity to grow without causing inflation. On Friday, Trump said in a post on Truth Social that because the economy is growing so much, the U.S. should have the lowest interest rates in the world.

Administration officials have emphasized the recent three-month annualized rate of the cor Consumer Price Index (CPI) running at 1.6%. That compares with the three-month annualized rate of the core Personal Consumption Expenditures (PCE) price index, the Fed's preferred indicator, at just over 3%.

But several Fed officials have expressed concern that inflation has run substantially above the Fed's 2% target for five years, and that there are signs of inflation beyond Trump's tariffs and rising energy costs due to the U.S. war with Iran. Three dissented — Beth Hammack, Neel Kashkari and Lorie Logan — in favor of a quarter-point hike at the July meeting, where interest rates were left unchanged.

Warsh, in his speech in Jackson Hole, said the Fed's focus needs to be squarely on inflation, noting that 54% of the 199 components in the PCE price measure had risen more than 3% over the previous 12 months. By rejecting the connection between growth and inflation, the administration is challenging a central concept in economics: that an economy growing beyond its productive capacity risks generating inflation.

The most famous of these ideas, the Phillips Curve, sees tight labor markets and rising wages as the major conduit for inflation. That's likely why markets raised the probability of a Fed rate hike after Friday's strong jobs report. Yet wages were well contained in the report: Average hourly earnings rose 0.3% in August and 3.1% from a year earlier, while the unemployment rate remained at 4.1%.

The administration's argument that increasing the supply side of the economy raises capacity and offsets inflationary pressures could be accurate, but it has a timing problem. The flood of investment into artificial intelligence is projected to eventually increase productivity. But current data shows demand for the equipment needed to build out AI infrastructure is raising prices.

Markets will be focused on the Friday CPI report, which Fed officials have said will be a critical gauge of whether inflation is easing or still accelerating — and it could decide whether the Fed hikes or holds. No FOMC member has recently discussed rate cuts publicly.