Many critics anticipated that when President Donald Trump appointed Kevin Warsh as chairman of the Federal Reserve, he was getting a hack who would follow Trump’s order to cut rates regardless of the explosive consequences.
On Wednesday, that’s not what happened — and Trump is likely stewing.
“[Warsh’s] hard line on inflation must have … surprised Warsh’s patron, President Trump,” argued American Prospect co-founder Robert Kuttner.
The Federal Reserve refused to lower interest rates from its current target range of 3.5 to 3.75 percent for short-term rates. Worse for Trump, the vote of the whole fed was 9-to-3, with three regional bank presidents voting to raise the target range for the federal funds rate by a quarter percentage point. Kuttner said this was the first time since 2016 that three officials dissented in the same direction.
“The split vote signals that the Fed, despite President Trump’s wishes for a rate cut, is likely to vote for a rate hike between now and the November midterms. That’s because several factors, some of them of Trump’s own making, are increasing inflation, including the Iran war and retail price increases resulting from Trump’s tariffs,” said Kuttner.
The decision to keep rates steady “tanked the Dow,” according to CNN anchor Kasie Hunt, delivering “the worst trading day for more than year.”
But if Trump is stomping around the White House right now he only has himself to blame, said Kuttner.
“Our impulsive and oblivious president is not good at connecting dots. One set of Trump policies raises inflation, while Trump pressures the Fed to ignore the problem and cut interest rates,” said Kuttner. “In his report to Congress on July 15, Kevin Warsh … surprised many observers by ignoring the Fed’s ‘dual mandate’ to pursue both price stability and high employment.
In fact, Warsh had said, “The members of our [Federal Open Market] Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability.”
Plus, Kuttner said Warsh made no mention at all of employment, implying Trump should have seen this coming.
“Bonds are under pressure because of the massive increases in the federal debt under Trump, compounded by a lot of borrowing for the AI bubble and data center build-out. In many respects, these signals are a more important factor in Fed thinking than the month-to-month inflation rate,” Kuttner said.
Worse for Trump, there are two more meetings of the policy-setting Federal Open Market Committee between now and November, when Trump’s voters are likely to show Trump how unhappy they are with his economy. And the challenge facing the Fed is that the widely expected rate hike won’t even be able to act fast enough to fix what’s broken about Trump’s economy.
“And since the inflation is not the result of overheated demand but of the impact of the Iran war and Trump’s tariffs, higher rates will not moderate these prices,” said Kuttner. “But leaving rates alone would signal an indulgence of inflation that Warsh and his colleagues want to avoid.”
