Kevin Warsh, Chair of the U.S. Federal Reserve (Fed), delivered his clearest “hawkish” message since taking office in his Jackson Hole speech. There is speculation that it could clash with U.S. President Donald Trump, who does not welcome the interest rate hike.
Chairman Wassier stated that if inflation does not slow down at a sufficiently adequate pace toward the Fed’s 2% target, he would take further action. In particular, the market views this as a step back from Chair Wash’s long-held stance of a “quiet Fed.” Because he had previously been wary of providing forward guidance that would preemptively indicate the direction of future monetary policy, this time he explained in relatively detail under what conditions he would move interest rates. Accordingly, the possibility of a rate hike at next month’s Federal Open Market Committee (FOMC) has surged.
The problem is actual behavior. If Chairman Wirth raises interest rates as he has said, the likelihood of a direct clash with President Donald Trump, who has publicly been calling for rate cuts, will increase. Conversely, there is also analysis suggesting that if interest rates are kept unchanged, the market could lose confidence in the government’s commitment to addressing inflation. There is speculation that tensions between the White House and the Federal Reserve could rise further ahead of the midterm elections this November. According to Reuters and the Wall Street Journal (WSJ) and other foreign media on the 29th (local time), the market assessed that Chairman Worthy’s Jackson Hole speech has enabled people to understand his monetary policy decision-making criteria much more clearly than before. Chairman Worthy has long been classified as a prominent hawkish figure who has emphasized inflation control and monetary tightening since his time as a Federal Reserve governor. However, since taking office as chairman last May, he has refrained from making specific remarks about his policy judgment criteria or the future course of interest rates. Even after the FOMC meeting held on the 28th and 29th of last month, which kept the benchmark interest rate unchanged at 3.50–3.75%, showed strong caution about inflation, but remained tight-lipped about under what circumstances the Fed might raise or cut rates.
Chairman Worthy has emphasized a “stiff Fed” because forward guidance, which informs the market of the interest rate path in advance, could distort price formation in financial markets. However, complaints arose in the market that even the minimum standards for policy decisions were difficult to understand, and there were also criticisms that the Fed’s excessive silence was actually increasing uncertainty. Such a Wash chairman showed a changed appearance at Jackson Hole. In a speech at an economic policy symposium held in Jackson Hole, Wyoming, he said, “We need to be confident that the underlying inflation is moving toward the target at a clear and sufficient pace,” adding, “If not, there is something we need to do.” Although he did not directly mention the possibility of a rate hike, it was enough of a statement to be interpreted as a signal that the benchmark interest rate could be adjusted further if inflation does not slow down sufficiently.
Chairman Worthy also emphasized that "short-term interest rates are a key tool for the Fed to fulfill its two major mandates." It also directly mentioned specific price indicators. Regarding the Fed’s preferred Personal Consumption Expenditures (PCE) price index rising 3.7% year-over-year in July, he said, "The figures are more worrisome." He said that the Consumer Price Index (CPI) inflation rate is also at 3.4%, adding, "Everyone is saying something along the same lines." In the end, his judgment is that the current inflation rate in the United States is still far above the Federal Reserve’s target of 2%.
The WSJ evaluated that Chairman Wirth’s recent speech expressed his resolve to curb inflation most strongly, while also providing the Fed with its clearest explanation since taking office on how it would achieve it. Nathan Seitz, Citigroup’s Global Chief Economist, also said, “Now we understand much better how Chair Wash views the economy,” calling it “a very useful and constructive change.” He said that, in particular, compared to the July press conference, the very fact that they could now confirm Chairman Worthy’s judgment was a meaningful step forward.
At the market, Chairman Wash’s remarks were immediately reflected in the interest rate outlook. In the federal funds rate futures market, the probability of a rate hike in September surged from about 35% before the speech to around 57.5%. Meanwhile, the probability of a rate hold fell to 42.5%, making the scenario of a rate hike more likely than a hold. However, the market’s evaluation has not yet been completed. To maintain the trust Chairman Wash gained through this speech, he ultimately needs to demonstrate it through real action at the September FOMC.
Aditya Bhav, head of U.S. economic research at Bank of America, said, "Unless the August employment and inflation data come out very weakly, the responsibility now lies with Wash to implement a rate hike in September," adding, "Otherwise, there is a possibility of losing the confidence we gained today." The Federal Reserve will hold an FOMC meeting on the 15th and 16th of next month to decide the benchmark interest rate. The upcoming employment and inflation data are expected to have a decisive impact on Chairman Worthy's judgment.
Chairman Worthy’s concerns do not stop at monetary policy itself. Because the possibility of a clash with the White House is also growing. President Trump has publicly pressured the Federal Reserve, arguing that interest rates should be lowered for the sake of the U.S. economy. President Trump’s logic is that lowering interest rates would reduce the financial costs for businesses and households and could stimulate economic growth. In this situation, if Chairman Wash raises interest rates citing inflation, it would directly contradict the president’s demands.
The Financial Times (FT) assessed that Chairman Wash could carry out an interest rate hike that President Trump does not want, just weeks before the November midterm elections, and that the White House and the Federal Reserve could be heading toward a “collision course.” Eswar Prasad, a professor at Cornell University, analyzed, "Warsh drew a clear line regarding his goals and intentions," adding, "He could directly clash with Trump, who is demanding a rate cut regardless of economic indicators or their outcomes." The New York Times (NYT) also noted that President Trump chose Chairman Worthy after going through the process of looking for someone to back his monetary policy vision. If such a chairman of the Wash raises interest rates ahead of the midterm elections, tensions between the White House and the Federal Reserve could rise significantly.
The Trump administration’s willingness to cut interest rates is also evident in its fiscal policy.
Treasury Secretary Scott Bessent’s move to expand Treasury buybacks to curb the sharp rise in U.S. long-term Treasury yields is also interpreted in the same context. In the end, Chairman Wash will end up bearing the burden no matter which side he chooses. Raising interest rates would lead to a clash with President Trump, while holding them steady could betray his own statements and market expectations that inflation is his top priority. Morris Obstfeld, senior fellow at the Peterson Institute for International Economics, said of the situation, "He is carrying multiple targets on his back." It was assessed as an "unwinnable situation." Therefore, the upcoming September FOMC meeting is expected to be a rate-setting conference unlike any other. This is expected to be the first test of whether Chair Wash can turn his principle of “price stability” into actual policy, while also maintaining the Fed’s independence from political pressure. Reporter Lee Gyu-hwa (david@dt.co.kr )
Based on indicators such as new employment, Citing the midterm election I think it might be frozen.
The key point seems to be that, from the start, the Fed does not want interest rate changes before the midterm elections.
