Donald Trump wants rate cuts – it would be a risky move for the new Fed chair.
- The latest inflation data shows prices rising at 4.2%
- Plane tickets, personal and medical care, recreation and communication costs are rising, alongside energy prices
- A rate cut now looks like an impossibility and a rate rise is an option
Donald Trump has been urging his new Federal Reserve Chair Kevin Walsh to cut rates: “We built the country by doing great and having rates low. What they do is when they raise interest rates, they try and kill success. I don’t want to kill success. We should actually lower interest rates.”
That now looks vanishingly unlikely. The latest inflation data shows prices rising at 4.2%. The culprit, of course, is energy, with energy bills almost 25% higher in May than a year earlier. Data from the AA shows a gallon of regular petrol in the US is currently $4.15, up from just $2.98 at the end of February.
There are signs that the inflationary impact is spreading, with plane tickets, personal and medical care, recreation and communication costs also rising. George Brown, senior economist at Schroders, says: “Energy remains firmly in the driving seat for US inflation, but there is a growing danger that a broader set of prices start to grab the steering wheel. Strong payroll growth suggests the economy is still running hot, increasing the risk that inflation becomes embedded rather than fading quickly.”
It is possible that the strength of the US economy will become part of the problem. The US labour market is buoyant, with the latest employment report showing 172,000 additional jobs in May. This was significantly ahead of expectations. Unlike in the UK, where the labour market is relatively weak, this raises the risk of accelerating wage inflation.
A rate cut now looks like an impossibility. Walsh has previously hinted that the wider adoption of AI could raise productivity and dampen inflation, but he seems unlikely to stake his reputation on it. The real debate now appears to be whether the Federal Reserve will raise rates. Lindsay James, investment strategist at Quilter said: “The question is now whether it can keep rates on hold without falling behind the curve. All eyes will be on Warsh’s debut press conference. He will need to convince markets that the Fed remains committed to price stability. If he leans more dovish, markets may begin to question that commitment, pushing Treasury yields higher.”
“A rate hike is the very opposite of what the White House wants and expects from the new Fed Chair Kevin Warsh,” says James. It remains an unlikely outcome from the next meeting. However, the bond market may move if the Federal Reserve appears slow off the blocks. The 2-year Treasury has been moving steadily higher since March and now sits at 4.15%.
Without a resolution to the war in Iran, any rate cut would be a kamikaze move from the central bank. Walsh will be hoping that he can stick with rates where they are for the time being, but even this brings risks. Policymakers are dicing with embedded inflation.
