Federal Reserve chair Kevin Warsh faces his first major test, caught between President Donald Trump’s demand for lower interest rates and growing market expectations that the central bank might need to raise rates later this month.
Trump on Friday resumes his pressure tactics on the US central bank, calling on the Fed to lower rates following a stronger-than-expected jobs report.
“Lower the interest rates because the U.S.A. is a much stronger credit than it was just a short time ago!” Trump said in a social media post. “The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change.”
Trump’s intervention adds a political dimension to a Fed policy decision that officials have been closely tying to incoming economic data, particularly inflation.
The President had routinely attacked the previous chair, Jerome Powell, over the bank’s policy decisions, but reasonably pulled back the pressure campaign against the Fed after Warsh took over. Friday’s message shows that he is now running out of patience.
Decision hinges on next week’s inflation data
The US jobs report showed nonfarm payrolls increased 162,000 last month and July’s job losses were revised away, suggesting the labour market has more momentum than previously thought. But analysts say the report alone is unlikely to determine the Fed’s next move, with the central bank’s decision expected to hinge largely on next week’s inflation data.
“Today’s data lends support to the hawkish camp, but stops shy of making a definitive case for a rate hike on September 16,” Vail Hartman, a strategist at BMO Capital Markets, wrote. “While the market-implied probability of a rate hike this month has increased, the employment data will play a secondary role to inflation.”
That puts next week’s inflation readings firmly in focus. The Bureau of Labor Statistics will release August data for the producer price index on Thursday, followed by the consumer price index on Friday.
Olu Sonola, head of US economics at Fitch Rating, described the jobs report as “unequivocally strong”, but said: “The real event risk is next week’s CPI report. That is the print capable of moving the needle.”
In a similar note, Mark Spindel, chief investment officer at Potomac River Capital LLC told Bloomberg, today’s jobs report corrected some of the previous weakness in the employment data, particularly in sectors like public schools.
“As strong as today’s data was, I don’t think anyone will be triggered to tighten on today’s data alone,” he said. “Next week’s inflation report will be determinative.”
Fed remain divivded
With Fed officials concerned about persistently high inflation but divided over how monetary policy should respond in the near term, new evidence of price pressures could tilt the Federal Open Market Committee toward a rate hike. Three policymakers dissented at the July meeting in favour of a quarter-point hike, while Governor Christopher Waller said during a Reuters event that he is inclined to hold rates unless the inflation data comes in “hot.”
For Warsh, the dilemma is particularly significant. So far, the new Fed chief has talked tough on inflation, but has pointedly avoided any specific hints that he favours a rate increase in the coming months.
At Jackson Hole last week, Warsh said policymakers must be confident inflation is meaningfully slowing, otherwise they had “work to do.”
The decision could therefore become Warsh’s first major test of how he balances economic data, market expectations and growing political pressure from the White House.