Fed Chairman Warsh raises interest rates despite Trump's demands

Kevin Warsh sent a clear message on Wednesday evening. “Our decision today was the right one,” said the new head of the US Federal Reserve (Fed) after the meeting. Inflation is too high and has been for too long. The Fed therefore raised the key interest rate by 0.25 percentage points to a range of 3.75 to 4.00 percent.

That alone wasn't a surprise. The financial markets had expected the increase. What is more remarkable is who made this decision: Kevin Warsh, whom Trump himself had put at the head of the Fed and from whom the president had hoped for a significantly looser monetary policy.

"The interest rate decision can be interpreted as a declaration of war. Above all, as a declaration of war on the Fed's assertiveness," says Ascan Iredi, capital market strategist at Plutos Vermögensverwaltung, to the ARD financial editorial team.

Trump's hope for a change of course

When Trump appointed Warsh as the new Fed chief at the beginning of the year, there was also hope for a change of course. In May, the Republican-dominated Senate confirmed Trump's preferred candidate. The US President had repeatedly attacked his predecessor Jerome Powell because of his interest rate policy. From Trump's point of view, interest rates are too high.

After Warsh took office, Trump made no secret of what he expected: the key interest rate in the USA should fall to one percent or below. He reiterated this demand on Wednesday.

Lower interest rates make loans and mortgages cheaper, among other things, and can therefore support the economy and the real estate market. The US has $40 trillion in debt. “Every increase in interest rates obviously costs money. And people hope for relief,” explains Andreas Lipkow, analyst at CMC Marktes, in an interview with the ARD financial editorial team. However, interest rate cuts are wishful thinking on the part of politicians.

Fed is not signaling a U-turn for the time being

Wednesday's decision does not fit Trump's ideas. The Fed unanimously raised the key interest rate by 0.25 percentage points. As a reason, Warsh pointed to the persistently high inflation. At the same time, the economy and labor market are robust enough to withstand further tightening of monetary policy.

"I think Warsh is a hawk. He has always been a hawk and he is now implementing what is ultimately important for monetary stability," says capital market strategist Iredi. In the financial world, “hawks” refer to decision-makers in central banks who prefer a strict and restrictive monetary policy to combat inflation.

The Fed is not signaling a quick turnaround in the coming months either. In their new projections, the central bankers expect a further interest rate hike by the end of 2026. The majority of Fed members therefore continue to envisage higher interest rates.

Warsh emphasizes independence

Warsh justified the latest monetary policy decision with the Fed's legal mandate and emphasized its independence. Warsh did not want to answer the question about his message to Trump at the press conference. Instead, he referred to the task of the central bank: The independence of the central bank also includes taking care of its own affairs.

“The independence demonstration is a very, very important step,” said analyst Lipkow. The fight between the central bank and the president has caused great uncertainty in the financial markets in the past.

Trump reacts promptly

The president continued to describe Warsh as a "good man" to reporters, but accused the Fed board of raising interest rates for political reasons. The interest rates are too high, he wrote again on the Truth Social platform.

The fundamental conflict therefore remains: Trump wants a significantly looser monetary policy, while the Fed is sticking to a comparatively high level of interest rates in view of inflation. The crucial question will be how Warsh reacts if Trump further increases the pressure on the central bank.

"Actually, this interest rate increase was long overdue. This has caused a small amount of damage in terms of credibility," says Jörg Krämer, chief economist at Commerzbank. Warsh must do more to convince Americans and the financial markets that he is truly independent of Trump.

The dollar is gaining

It was less the interest rate hike itself that caused movement on the financial markets than the Fed's outlook. The dollar gained on Thursday. The dollar index temporarily rose to its highest level since the end of July. The euro temporarily fell to around $1.15.

Currency strategists viewed Warsh's statements as more hawkish than expected. Above all, the indication of a possible further interest rate hike supported the dollar. Because higher US interest rates can make investments in dollars more attractive.

On Wall Street, however, the reaction was negative. The Dow Jones lost 1.2 percent on Wednesday. The prospect of potentially prolonged high interest rates weighed on the stock markets.

DAX up at midday

The German stock market initially showed a different picture on Thursday. The DAX rose by around 0.6 percent at midday.

An important reason for this was the continuing fall in oil prices. Brent crude oil had already become significantly cheaper on Wednesday. Evidence of a possible partial resumption of an important oil pipeline in Saudi Arabia had weighed on oil prices.

What remains crucial for the markets is how inflation develops in the coming months. If price pressure remains high, the Fed could keep its monetary policy tight for longer. However, if the energy price surge subsides, inflationary pressure could decline again.