Investors shrug off Trump trade threat over interest rates

Investors think the Federal Reserve will hike interest rates, with just a week until the next monetary policy meeting, even though President Donald Trump threatened to cut off trade to certain countries if the central bank does not lower rates.Trump has pushed for lower rates since the start of his second term and has yet to get a single rate cut. As the war with Iran continues and inflation remains elevated, the Fed appears poised to do the very opposite of what Trump wants. Investors are indicating that they think new Fed Chairman Kevin Warsh, who has struck a hawkish tone toward inflation, will navigate the central bank through a rate hike despite the pressure from the White House.“I think the president was just venting his spleen — markets are taking it that way, and I am too,” Ryan Young, a senior economist at the Competitive Enterprise Institute, told the Washington Examiner.The implied odds of a rate hike next week are now over 60%, according to CME Group’s FedWatch tool, which calculates the probability of rate changes using futures contract prices for rates in the short-term market targeted by the Fed.The Fed is designed to function independently of the White House, and the fact that investors still expect a hike despite Trump’s rhetoric indicates that they are confident that Warsh will work to uphold that firewall.Trump repeatedly pushed Warsh’s predecessor, Jerome Powell, to lower interest rates, but since Warsh has become chairman, the president has appeared to back off a bit, affording the new chairman a bit of a honeymoon period. Trump has not blamed Warsh for the Fed not yet cutting rates, but rather has cast the blame on other members of the Federal Open Market Committee, which sets the rate target.But last week, Trump made perhaps his strongest push for lower interest rates since Warsh started at the central bank.Trump threatened on social media to cut off trade to countries with which the United States has a trade deficit if the Fed does not lower interest rates.Trump made the announcement on Friday after the release of employment numbers that showed that the economy added many more jobs than anticipated. The stronger jobs numbers, coupled with still-too-high inflation, increased expectations that the Fed would raise interest rates at its next meeting.But Trump took to social media and pushed for the Fed to do the opposite.“Lower the interest rates because the U.S.A. is a much stronger credit than it was just a short time ago!” Trump wrote on Truth Social. “A STRONG COUNTRY MEANS A LOWER INTEREST RATE – IT’S A BETTER CREDIT…Very simple! We should have the LOWEST RATE of any country in the World, like ‘the old days.’ Without the United States agreeing to allow them their big surpluses, and we could stop that immediately, they would no longer be considered financially ELITE!“LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT, which the U.S. Supreme Court, in its ridiculous and very costly Tariff decision, strongly acknowledged ‘the President’ has an absolute right to do. IT’S BETTER THAN TARIFFS! The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change.”Trump’s messages appear to be referencing the Supreme Court’s 6-3 ruling in Learning Resources, Inc. v. Trump, issued in February.In that, the high court ruled that the president cannot use the International Emergency Economic Powers Act to impose blanket tariffs, but the justices left the door open for him to use other trade powers under IEEPA to impose a total trade embargo under a declared national emergency.Despite the pressure from Trump, Young pointed out, Warsh has struck a hawkish tone in recent weeks.Inflation is still well above the 2% level that the Fed considers to be healthy. Warsh emphasized this during his annual speech at the Jackson Hole Economic Policy Symposium late last month.Warsh pointed out that inflation is running too hot in several gauges, such as the consumer price index and the personal consumption expenditures price index, which is the Fed’s preferred gauge.“None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2% target,” the chairman said. “So the Fed’s predominant focus right now should be on prices.”Inflation held at 3.7% for the year ending in July, the Bureau of Labor Statistics said in its most recent update to the PCE gauge. CPI inflation fell one-tenth of a percentage point in July to 3.4%.During the speech, Warsh said the Fed, under his chairmanship, remains committed to its existing target of 2% long-run inflation. Some have questioned the 2% target in recent years, but Warsh affirmed it during the closely watched address.He said there “should be no misunderstanding” that the “Fed’s price-stability objective of 2%, as measured by the personal consumption expenditures price index, is a firm, fixed target.”“Yeah, he’s so far convincingly hawkish, although it is still early — but I’m just hoping he sticks to it,” Young said. “So a rate hike would positively reinforce that perception that he means what he says on inflation.”