Fed rate move tests Warsh’s delicate truce with Trump
Por Victoria Guida and Katherine Hapgood — POLITICO – TOP Stories
The Federal Reserve is expected to hike interest rates for the first time in three years on Wednesday, piling on to Republicans’ economic woes before the elections, from soaring oil prices and two-decade-high government borrowing costs to unhappy consumers.
Fed Chair Kevin Warsh and his fellow officials will likely increase their benchmark rate in a bid to show that the central bank is serious about taking on inflation. While the move could help slow the rising cost of living, higher rates could further squeeze an already-struggling housing market, where mortgage rates have topped 7%, and depress consumer sentiment, which is already near record lows.
Many Republican lawmakers are resigned to the outcome.
“There’s some things I have no control over and I just have to deal with,” Rep. Frank Lucas (R-Okla.), who chairs a House task force on monetary policy, told POLITICO.
Investors overwhelmingly anticipate that the Fed will raise rates, but the real question is whether the central bank stops there: Already, markets are pricing in the possibility of at least one more hike this year. That could return borrowing costs to roughly where they stood when President Donald Trump took office in 2025 — at a time when the central bank expected rate cuts to be more likely than not — and keep them stuck at decades-high levels.
The U.S. economy has been resilient in the face of those higher rates, as well as a host of other Washington-imposed shocks. But pressure is growing on a number of fronts, and rate increases would add to existential questions about whether the artificial intelligence boom can last, where trade policy will settle and when the U.S. can finally end a war that’s pushing up energy prices.
The timing is especially awkward politically for Warsh, who was chosen by Trump early this year in the hopes that he would lower rates, something the now-Fed chief suggested was reasonable last year in the lead-up to his nomination. But since he was tapped for the job in January, the U.S. entered the conflict with Iran, further stoking price increases on top of higher tariffs, red-hot investment in artificial intelligence infrastructure and robust consumer spending.
Warsh last month laid the groundwork for potential rate hikes amid signs that inflation was not on track to ultimately return to the Fed’s 2% target.
Since Warsh took over the central bank in late May, Trump has softened his rhetoric on the institution, a marked shift from his savage attacks on former Fed Chair Jerome Powell, who remains on the central bank board. Trump often mused about firing Powell as chair but never followed through.
White House senior official Kevin Hassett on Tuesday said Trump will respect whatever decision the Fed makes. But such a move would challenge the delicate truce between the institutions.
“It’s one of those things that will test the independence of the Fed,” Lucas said.
Some GOP lawmakers said combating inflation over the longer term is more important than election-year optics.
“Obviously, it cools the economy down when you have a hike, but I think that we’ve got pesky inflation right now that’s really indicating that we need to do it,” said Rep. Troy Downing (R-Mont.). “It would be a good message from Warsh showing that he is actually serious about the policy here.
“I mean, it’s always uncomfortable to do that before an election cycle, but I think that the data is leaning in that direction,” he added.
It’s possible that a move this close to the election will do little to affect the outcome, since the Fed’s rate actions often take time to wend their way through the economy.
“There is a massive disconnect between how the political system thinks of what the Fed does in the run-up to an election, and the impact of what it does,” said Jason Furman, a Harvard professor who previously served as chief economist to former President Barack Obama.
“They think it’s some huge election-shifting thing, and it just isn’t,” he added. “The impact on jobs and inflation happens with a long and variable lag and lands well after the election. … What happens [this week] matters a lot to what happens to the economy over the next year or two. It just doesn’t matter over the next month or two.”
Rep. Bill Huizenga (R-Mich.) also pointed to the Fed’s experience with high inflation after Covid-19 as a cautionary tale — when the central bank did not begin raising rates until 2022 despite a spike in inflation that began in April 2021.
“Last Fed administration, they were too late coming into the reality of interest rates,” he said. “I would expect that Kevin Warsh would look at the data and the fundamentals of the economy and trust them on that.”
He argued that for now, high fuel costs were a bigger concern.
Rep. Andy Barr (R-Ky.), who is running for Senate, put it more bluntly: “No, I’m not worried about it. I trust Kevin Warsh.”
Fonte: POLITICO – TOP Stories
