As the U.S. job market shows stronger-than-expected momentum and the likelihood of an interest rate hike within the year grows, U.S. President Donald Trump publicly urged new Federal Reserve (Fed) Chair Kevin Warsh to cut rates. With markets pricing in the possibility of a hike, the president delivering a message in the opposite direction has rekindled debate over the Fed's independence.
Trump said in an interview with NBC on the 7th, "The United States grew thanks to low interest rates," adding, "When the economy succeeds, the Fed raises rates to kill that success." He continued, "There is absolutely no reason to raise rates; they should be cut instead."
Trump has argued that the benchmark rate, currently at 3.5%–3.7% annually, should be lowered to below 1%. He also criticized former Chair Jerome Powell for being slow to cut rates, using harsh terms such as "idiot" and "moron."
The mood in financial markets, however, is moving opposite to Trump's expectations. U.S. employment data released on the 6th far exceeded forecasts, prompting assessments that the labor market remains solid. According to the Labor Department, U.S. nonfarm payrolls in May rose by 172,000 from the prior month. That is more than double the 80,000 expected by a Dow Jones survey. It slowed slightly from the revised April figure of 179,000 but still maintained a strong hiring trend.
Despite a surge in international oil prices due to the fallout from the Middle East war and rising concerns about a slowdown, the U.S. economy's unexpectedly firm showing has led investors to more strongly price in the possibility of a rate hike within the year.
The bond market is also reacting sensitively to the risk of a resurgence in inflation. On the 19th of last month, ahead of Chair Warsh's inauguration, the yield on the 30-year U.S. Government Bonds spiked intraday to 5.189%, a record high since 2007.
In particular, energy prices have risen since the Iran war, heightening worries about inflationary pressures. The U.S. consumer price inflation rate in April was 3.8%, the highest in three years. Markets are also entertaining the possibility that the consumer price index (CPI) increase for May, to be released on the 11th, could top 4%.
Within the Fed, there are also rising voices of concern about prices. Beth Hammack, president of the Federal Reserve Bank of Cleveland, recently said, "If the current trend continues, policy action may be needed before long," hinting at the possibility of further tightening. Hammack said, "The labor market is broadly in balance, and elevated inflation is the greater concern."
Warsh will preside over his first Federal Open Market Committee (FOMC) meeting after taking office on the 16th–17th. Although he was previously considered relatively dovish, the environment he faces right after inauguration is seen as challenging. Employment is stronger than expected, inflation is turning higher again, and within the Fed there are growing voices mentioning the possibility of a rate hike.
Trump said, "I hope Chair Warsh decides as he wishes," but again stressed, "When the economy is doing well, you don't punish it by raising rates—you should encourage it to grow further."
With markets and the White House at odds, attention is focused on what message Warsh will deliver at his first FOMC meeting. Reuters assessed, "Far from cutting rates, even just tamping down market expectations for a rate hike will be a difficult task for Warsh."