Trump Says He ’Respects’ Warsh as Fed Edges Toward Rate Hike He Did Not Want

Donald Trump nominated Kevin Warsh to lead the Federal Reserve in January because he believed the appointment would bring lower interest rates. He said so at the time and repeated it in the months that followed. Instead, he got a central bank chair who has kept rates unchanged at every meeting since taking office in May, opened the door to a rate increase at Jackson Hole last week and now faces a September decision that markets are pricing at a 60% chance of a hike — not a cut. Trump's response, delivered to reporters in the Oval Office on July 29 after the Fed's second consecutive hold, was notable for what it left unsaid. He called Warsh "brilliant" and said he would "do what he has to do." He did not demand lower rates or threaten consequences. Instead, he directed blame at the Board of Governors, saying its members "prefer to keep interest rates high" and that "we will continue pushing." For an administration that has applied unprecedented public pressure on the Fed's leadership, the restraint was conspicuous.

That restraint has limits. In a separate CNBC interview before Warsh's first meeting as chair, Trump said he would be "disappointed" if rates did not fall. The two statements do not cancel each other out, but they came more than a month apart, during which Warsh's signals shifted from possible patience to clear concern about inflation. Together, they underscore the gap between what Trump expected from his nominee and what the economic situation has produced.

Warsh took the job after writing in a Wall Street Journal opinion article, published before his confirmation hearing, that artificial intelligence could be a significant disinflationary force — a view that Fed watchers interpreted as a possible basis for lower rates. At his April confirmation hearing, he also said he had made no deal with Trump on interest rates and would not become the president's rate-setting proxy, telling a senator "absolutely not" when asked directly whether he would be Trump's rate puppet. He called for a "regime change" at the Fed, including a smaller balance sheet, a new inflation framework and far less public commentary, while leaving his own rate preferences open. The nine dissenters at the Fed's June meeting, all of whom voted for a hike, showed that the institution was already moving in a direction Warsh chose not to block.

By Aug. 28, at the annual Jackson Hole economic symposium in Wyoming, any remaining ambiguity in Warsh's position had largely disappeared. He said policymakers must be confident that underlying inflation is moving toward the 2% target "clearly and at sufficient speed," adding that "we have work to do" if it is not. He noted that he and those who voted to hold rates in July "thought the wiser course was to await new information in the intermeeting period before deciding whether a change in interest rate policy was advisable" — language analysts viewed as a conditional commitment: show me the data, and if it does not improve, I will act. The evidence since then has not improved in the way he would need to remain comfortably on hold.

Inflation, which the Fed's June projections showed running well above its 2% target, has been driven in part by energy costs linked to the war in Iran. The AAA national average price for diesel reached a record $5.85 a gallon on Friday, up nearly 56% since the war began, while gasoline averaged $4.15. These are supply-side shocks that rate hikes cannot resolve at the source, but they can become embedded in inflation expectations if the Fed appears willing to tolerate them. Warsh said at Jackson Hole that although gas prices had fallen somewhat, underlying inflation had not "meaningfully improved." Adam Posen, president of the Peterson Institute for International Economics, summed up the bind Warsh had created for himself: "You are basically setting yourself up so that if you don't hike in September, people may ask what's going on."

Friday's jobs report complicated the picture further. The economy added 162,000 jobs in August, more than three times the 53,000 economists had expected. The unemployment rate held at 4.1%, while wages rose 0.3% during the month. A labor market this strong weakens the argument that tighter policy would damage employment — the main reason central banks hesitate to raise rates in an uncertain environment. The Fed's governors, three of whom dissented in favor of a hike at the July meeting, now have a data point supporting their position. The August CPI report, due just days before the Sept. 15–16 FOMC meeting, will be the final piece of information Warsh said he was waiting for.

The political implications of a September hike are awkward for all sides. The Fed is scheduled to meet in September and again in late October, both before the midterm elections on Nov. 3. A rate increase at either meeting would raise borrowing costs for mortgages, car loans and business credit just as voters are most focused on economic conditions. Trump argued in 2024 that the Fed's half-point cut that September was politically motivated. A hike two months before his party faces voters would turn that accusation on its head without resolving it. Since the July meeting, he has been careful not to say publicly that a rate increase would be wrong — only that he respects the chair and hopes rates will fall. The wording keeps him at a plausible distance from the decision while making his preference clear.

Warsh, for his part, has shown no sign of adjusting his framework to the midterm calendar. His aversion to forward guidance — the practice of signaling future moves, which he criticized his predecessors for doing — means he will not pre-commit to a hike any more than he would pre-commit to holding rates. The August CPI report, not the political schedule, is the variable he has told markets he is watching. If it comes in above expectations, the data alone would make a hike difficult to argue against, and the credibility Warsh built during his confirmation hearing would be tested by any decision to stand down. If the report comes in below expectations, the market's 60% probability will disappear, and Trump's preference for lower rates will have been served without him having to ask.

What has emerged in the four months since Warsh took office is a relationship between the White House and the Fed that looks less like the confrontation of the Powell years and more like a carefully managed distance. Trump wants lower rates and says so; Warsh does not deliver them and explains why; Trump calls him brilliant and says he will do what he has to do. The arrangement works as long as Warsh holds rates steady. A hike would test whether it can last.

The September meeting is 11 days away. The CPI report that will largely determine its outcome has not yet been released. Friday's jobs report was the last major data point Warsh will see before then that unambiguously supports tighter policy. He said in Wyoming that he would be watching. Markets are pricing in the assumption that he was serious.

Originally published on HNGN