Wash maintained the balance between the White House and the Federal Reserve with the tactics of "saying less and avoiding provocation," but after this meeting, silence will no longer be a shield.

Written by: Long Yue, Wall Street Journal

Last year, Trump pressured the Federal Reserve to cut interest rates, but now the chair he personally selected is being pushed towards interest rate hikes by the market.

On September 14, "New Federal Reserve News" Nick Timiraos published an article in the Wall Street Journal discussing a key decision facing Federal Reserve Chair Kevin Wash: in the context of persistent inflation and rising energy prices, whether to announce an interest rate hike at this week’s meeting.

Timiraos believes that Wash’s series of statements over the past few months has left him almost no room to "stay put." The CPI data for August exceeded expectations, completely cutting off the last avenue of retreat. Meanwhile, the White House's attitude is ambiguous—verbally stating "100% respects independence" while subtly hinting that they "would not be too happy" about an interest rate hike.

With only seven weeks remaining until the U.S. midterm elections, if Wash chooses to raise interest rates, it will directly test the "trust" Trump has expressed in him for several months. But if he does not raise rates, how will Wash's credibility fare? Previously, Wash maintained the balance between the White House and the Federal Reserve with the tactic of "saying less and avoiding provocation," but after this meeting, silence will no longer be a shield.

How did Wash corner himself?

After taking over as Federal Reserve Chair in May, Wash sent strong anti-inflation signals during his first news conference in June, and the market immediately expected him to take more aggressive action. However, at the subsequent meeting, he chose to keep interest rates unchanged without providing a convincing explanation—why, after his tough statements, did the policy remain stagnant?

The result was that long-term interest rates rose instead of falling during his remarks. Nick Timiraos wrote in the article that this was a signal of "investors' uncertainty about whether his tough rhetoric would translate into actual policy."

In August, Wash attempted to correct this impression during a keynote speech. He stated, "There is almost no evidence that borrowing conditions are restraining the economy," and the relatively good inflation data from summer did not convince him that underlying trends had improved. This statement was effectively paving the way for an interest rate increase.

But the true "closing of the last door" came from the CPI data in September. Nick Timiraos wrote, "The key consumer price index in August rose more than expected, breaking the improvement momentum of the previous two months," which had initially validated the Federal Reserve’s own predictions. After the data was published, the market's betting probability for an interest rate hike this week swiftly rose to about 90%.

More crucially, the data was released during the "silent period" before the Federal Reserve’s meeting, and no officials could come out to "cool down" the situation. As the September 17 meeting approaches, Wash's options are becoming increasingly limited.

What is hidden in the White House's "100% support"?

Just before this week's meeting, White House National Economic Council Director Kevin Hassett publicly stated on television that inflation is improving and that the Federal Reserve does not need to raise interest rates. He also emphasized that Trump "100% respects Kevin Wash's independence," and would "100% support" any decision made by the Federal Reserve.

These remarks sound dignified, but Hassett immediately added that Trump "would not be too happy" about an interest rate hike.

He also suggested that if the Federal Reserve adjusts rates close to the elections, it would "damage its reputation for being removed from politics." Nick Timiraos provided a reverse interpretation of this logic in his article: if the White House openly demands interest rate cuts, while the Federal Reserve chooses to remain still in the context of general market expectations for an interest rate hike, it would equally raise doubts about whether Wash is accommodating the president who appointed him.

In other words, no matter how Wash chooses, there will be questions about his motives. This is precisely the core dilemma surrounding the independence of the Federal Reserve.

Trump and the Federal Reserve: from "war" to "ceasefire"

Last year, Trump waged "the most sustained public pressure" on the Federal Reserve in decades. He repeatedly attacked former Chair Powell, even threatening to file a fraud lawsuit against him. He placed economic advisor Stephen Miran onto the Federal Reserve Board, who voted to support expansionary policies at all six meetings he attended. Trump also attempted to dismiss Federal Reserve Governor Lisa Cook—this was the first attempt by a president to fire a Fed governor, which ultimately failed due to Supreme Court intervention, but the case remains unresolved.

Wash's arrival temporarily ended this "war." Trump repeatedly expressed "trust in Wash to do the right thing," allowing Wash to avoid the kind of public attacks endured by Powell.

However, Nick Timiraos noted that this "ceasefire" is conditional. Raising rates seven weeks before the election will directly test how long Trump's "trust" can last.

It is worth noting that Wash publicly criticized the Federal Reserve for cutting rates too slowly last year. When asked whether this stance was influenced by the possibility of him being nominated by the president, he responded on CNBC, "Birds change their feathers at the right moment; it is important to follow the trend. This has nothing to do with this president."

Wash's position: independence or isolation?

In the face of various external speculations, Wash's public statements have always emphasized independence.

"They chose an independent person to do an independent job, and that is exactly what I plan to do," Wash said during a congressional hearing this summer.

Nick Timiraos also revealed a detail in the article: individuals who communicated with Wash indicated that he believes the Powell era's Federal Reserve worsened the situation by making some "unnecessary confrontational statements"—such as publicly describing how tariffs drove prices higher or openly defending the independence of the Federal Reserve. Wash's strategy is "to say less and avoid provocation."

This low-profile style has, to some extent, maintained peace with the White House. But if an interest rate hike is announced this week, silence will no longer be a shield.

What do economists think?

The academic community is not in unanimous agreement regarding this interest rate hike.

Former Congressional Budget Office Director and Republican economist Douglas Holtz-Eakin has a direct assessment. He stated that before July he believed Wash did not need to risk antagonizing the White House before the midterm elections. However, since July, Wash’s statements combined with the energy shock and the economic situation shaped by the AI boom have left him with "nowhere to stand."

"He has been forced to play his hand," Holtz-Eakin said, "Kevin Wash is a talented politician; he needs to find a way to handle this issue well."

He also predicts possible future trends: Trump and Wash could tacitly allow Trump to openly criticize Wash while Wash quietly endures; or Trump might simply change the subject, acting as if nothing happened. "Trump will change the subject rather than confront directly, as he cannot admit he was wrong," Holtz-Eakin said.

However, Michael Strain, a conservative economist at the American Enterprise Institute (AEI), has a different view. He believes rates should have been raised in July, but since that was not done then, acting now just weeks before the election is not a suitable time.

"The unfortunate reality for the Federal Reserve is that it cannot ignore President Trump's extreme hostility towards this important institution," Strain said. He believes that the speed with which investors digest "remaining still again" will be much faster than the speed with which the Federal Reserve recovers from its conflict with Trump.

Future direction: after the ceasefire

How resilient is the principle of the Federal Reserve's independence in the face of political pressure?

The article points out that adjusting interest rates before and after elections is not without precedent—the Federal Reserve has made similar moves before the political conventions in 1988, and in 1994, 2004, 2018, and during Biden’s term in 2022. Historically, the intersection of monetary policy and electoral cycles is not uncommon.

However, the current situation is unique in that Trump's hostility towards the Federal Reserve has been well-documented, and every step taken by Wash is being amplified and interpreted.

Holtz-Eakin’s assessment may be the most pragmatic: regardless of the outcome, Wash needs to demonstrate that he is making decisions based on economic data rather than political pressure.