Trump loses interest rate battle with the Fed

The Federal Reserve raised interest rates yesterday and signaled further increases in borrowing costs over the coming months, as new Fed Chair Kevin Warsh joined a unanimous decision that effectively acknowledged the Trump administration’s inability to rein in inflation to date.

While President Trump has pledged to lower prices during his term, the cumulative effects of the tariffs he imposed on global imports, the energy price shock following the start of the U.S.-Israeli war with Iran, and capital spending driven by the artificial intelligence boom have kept price pressures strong enough to prompt the Fed to hike its benchmark overnight rate by a quarter-point to a range of 3.75–4.0 percent.

New monetary policy projections showed that 16 of the 18 policymakers expect at least one additional quarter-point hike by year-end, while only two anticipate rates remaining at current levels. Warsh did not again provide a personal rate forecast.

This marks the first shift in monetary policy under the new Fed chair, who assumed office in late May after being selected by Trump on the expectation that he would favor rate cuts.

Speaking at a press conference following the central bank’s meeting yesterday, Warsh said that regarding the rate hike, “inflation remains elevated. Today’s policy action will support a faster return to the Committee’s 2 percent target.”

He added, “I find it difficult to describe financial conditions as restrictive. This view was widely shared within the Committee, so we removed some of the monetary easing.”

The dollar strengthened against the euro following the decision, while U.S. Treasury yields showed little change after having already declined in anticipation of the hike. After the benchmark 10-year Treasury yield touched its highest level in 19 years, surpassing 5 percent last Monday, it stood at 4.958 percent, compared with 4.946 percent just before the announcement.

CME Group’s FedWatch tool indicated that market expectations for a rate hike at the Fed’s next meeting in late October rose to 56.5 percent from 54 percent prior to the increase.

Michelle Ranieri, head of U.S. research and advisory at TransUnion in Chicago, said yesterday: “Today’s Federal Reserve decision to raise rates by a quarter-point reflects its continued focus on addressing persistent inflation. Although inflation has receded from its peak, it remains high enough to warrant additional action by the Federal Open Market Committee.”

The Fed’s new policy statement and economic projections indicate that the U.S. central bank is leaving the door open for further monetary tightening into next year, with the policy rate rising to a range of 4.0–4.25 percent by year-end and remaining at that level through the end of 2027.

In its monetary policy statement following the two-day meeting, the Fed stated: “Today’s policy action will support a faster return to the Committee’s 2 percent target.”

The statement contained no forward guidance on future policy decisions, in line with Warsh’s preference, but the decision is likely to dispel doubts that the Fed chair would refrain from tightening policy to accommodate Trump—a question that had lingered during his first months in office.

The statement removed a previous reference attributing the current rise in inflation to “supply shocks,” particularly in the energy sector, acknowledging policymakers’ concerns—including those of Warsh—that price pressures were broad-based to a worrying degree.

The rate hike comes less than two months before the midterm elections, which will determine whether the Republicans, led by Trump, retain control of Congress during the final two years of his presidency. Republicans face a tough fight amid voter anger over gasoline prices that are up by roughly one-third from a year ago, and mortgage rates that have risen steadily this year. The average 30-year fixed mortgage rate is approaching 7 percent.

The new quarterly economic projections from policymakers raised the inflation estimate, as measured by the Personal Consumption Expenditures price index, to 3.7 percent from 3.6 percent in the projections released at the Federal Reserve’s June meeting. Inflation is not expected to return to the 2 percent target until 2029, a year later than previously anticipated.

Economic growth estimates were slightly raised to 2.3 percent from 2.2 percent, while the unemployment rate is expected to end the year at 4.1 percent, compared with 4.3 percent in the June projections.

Major U.S. banks raised their prime lending rate to 7 percent following the Federal Reserve’s decision to increase its benchmark interest rate, a move that will raise borrowing costs for individuals and businesses.

Interest rate hikes boost bank profits by increasing net interest income, the difference between the returns banks earn on loans and the costs they pay on deposits.

For his part, President Trump delivered his sharpest—though still indirect—criticism to date of the Federal Reserve chair he himself appointed, expressing intense anger on social media over the central bank’s decision to raise interest rates to curb persistent inflation.

Despite the criticism of Kevin Warsh, Trump later told reporters that he still trusts the man he selected earlier this year to lead the Federal Reserve, succeeding Jerome Powell, whom the U.S. president has repeatedly mocked for not cutting interest rates by the amounts he has long demanded.

Trump also appeared to link the United States’ persistent trade deficits to the borrowing costs set by the “Fed,” despite the two issues being largely unrelated.

Trump had previously threatened to sever all trade relations with countries with which the United States runs a trade deficit unless the “Fed” cut interest rates.

Trump wrote, “The word (deficit) is just a fancy term for loss. We are bearing the burden of costs for virtually every country in the world, and this situation cannot continue any longer.”