While US President Donald Trump's pressure to lower interest rates continues, the Fed's interest rate decision this week turns into a critical test. While the August inflation data coming in above expectations strengthens the expectation of an interest rate increase, it is considered that a possible increase may increase the tension between the Trump administration and Fed President Kevin Warsh.
FED'S INDEPENDENCE WILL BE TESTED
When Kevin Warsh took office with an oath ceremony at the White House in May, Trump gave a message to his chosen Fed chairman to act completely independently. Trump told Warsh, "Do your own thing."
However, the interest rate decision the Fed will make this week will be an important test for the independence of the central bank.
INFLATION DATA STRENGTHENED INTEREST RATE INCREASE EXPECTATIONS
Consumer prices data released on Friday revealed that core inflation accelerated above expectations in August.
Following the data, the expectation in the futures markets that the Fed will increase interest rates at its meeting on September 15-16 rose above 85 percent. Thus, expectations that the Fed could pursue a tighter monetary policy within the scope of fighting inflation were strengthened.
INTEREST RATE REDUCTION PRESSURE FROM TRUMP
Trump continues to put pressure on the Fed to cut interest rates. While the US President gave messages that he could escalate trade wars if monetary policy is not relaxed, he reiterated on Sunday that borrowing costs in the US should be at the lowest level in the world.
When Trump was asked whether he expected an interest rate increase at the upcoming Fed meeting, he replied, "I don't know."
ECONOMIC PRESSURE IS INCREASING BEFORE INTERMEDIATE ELECTIONS
It is stated that the political pressure on the White House is increasing. As midterm elections approach, opinion polls indicate that voters are increasingly uneasy about rising costs of living.
Although the effect is not expected to be seen in the short term, as it may take months for the interest rate cut to be reflected in mortgage and credit card costs, for the Trump administration, the interest rate cut is considered an important step that can create expectations of relief in the economy.
HASSETT'S STATEMENTS DRAWN ATTENTION
White House National Economic Council Director Kevin Hassett said in a statement to Bloomberg TV on Friday that Trump wants interest rates to be reduced.
Hassett stated that if the Fed raises interest rates, Trump "will have something to say about it."
On Sunday, Hassett softened the tone of his statements. Hassett said that Trump would "not be very happy" with a possible interest rate increase, but stated that the priority was to defend Kevin Warsh's independence.
EYES ON FED'S INTEREST RATE DECISION
The central dilemma facing the Fed is between fighting high inflation and the pressure to support economic growth and keep borrowing costs low.
The decision to be taken at the meeting to be held on September 15-16 is of critical importance not only for the course of the US economy but also for the Fed's independence against political pressures.
