Trump Vs The Fed: Who's In Control Of Interest Rates?
In a Nutshell
Trump is threatening to halt trade with deficit countries unless the Fed cuts rates, but stronger-than-expected jobs data and rising inflation from his Iran/Strait of Hormuz actions have lifted the odds of a rate hike to 58%. This week's CPI report is the key trigger: hotter-than-expected inflation would cement the hike and pressure markets, while cooler data could support a pause. September's seasonal weakness plus oil-driven inflation adds further downside risk.
These notes were generated by AI and may contain inaccuracies.
This week is the last week before the Federal Reserve decides whether to raise or pause interest rates. The Federal Reserve is supposed to be an independent part of government and not influenced by the president or anyone else. A committee alone decides whether to raise, pause, or cut interest rates.
Trump is now threatening to stop trade with every country the United States runs a trade deficit with unless the Fed cuts rates. Trump has made various attempts to influence the Federal Reserve, especially when Jerome Powell was in power. Kevin Warsh was handpicked and nominated by Trump, so it was believed he would have some influence and would be more open to cutting interest rates. However, interest rates cannot be cut when inflation is rising.
Trump complained about the job report on Friday and how markets were selling off, yet employers added 162,000 jobs according to the nonfarm payroll report. This was much better than market expectations of 55k or 52k jobs. Earlier in the week, a weak labor market report came out and markets rallied because a weak labor market and aggressive rate hikes cannot coexist. At one point, the Fed rate monitor tool showed a 68% probability that the Federal Reserve was going to raise interest rates.
Raising interest rates would slow down the economy and help bring down inflation, but it also slows down the labor market even more. When the labor market earlier last week came in weak, markets celebrated. Trump had no problem with markets rallying with a weak labor market because it was in his favor. When the labor market proved it was not as weak as expected on Friday, it supported the case for a possible interest rate hike, and markets sold off.
There is now a 58% probability for a rate hike according to the Fed rate monitor tool. This would slow down the economy, which Trump does not want. Trump is begging the Federal Reserve to cut interest rates and threatening to stop trade with deficit countries if they do not cut rates.
Two major inflation reports are scheduled this week. The economic calendar shows:
- Wednesday: ADP weekly employment change
- Wednesday: 10-year bond auction
- Wednesday: PPI report (inflation on the producing side)
- Unemployment claims
- Consumer price index report (CPI data report, the most important report this week)
The CPI report expects a 0.2% rise. Core CPI (all items less food and energy) is expected to go down from 2.5 to 2.4. Overall CPI is expected to show no change at 3.4 to 3.4.
This week is important because there have never been such high probabilities for a rate hike since Kevin Warsh became the new head of the Federal Reserve, replacing Jerome Powell. The Fed rate monitor tool and the series of inflation reports will determine outcomes. If inflation comes in lower than expected, it could support a potential pause. If inflation comes in higher than expected, Trump will become very vocal because he cannot afford rate hikes.
None of the current inflation problems existed until Trump began including tariffs and the Iran war. The Iran war and closure of the Strait of Hormuz led to higher oil prices, which is one of the biggest contributors to rising inflation. This is a domino effect that began with Trump's military operation in Iran.
Statistically, September remains the toughest month for the market post-QE era. The market faces seasonal volatility, weak returns, and heightened economic uncertainty. September tends to have a 1.16% downturn, which is a reason to be selective but not a reason to sell.
Iran's IRGC announced it carried out the single largest attack in the Strait of Hormuz, striking six vessels with anti-ship missiles in retaliation for the US strike on three Iranian oil tankers. As attacks continue, oil prices are likely to push higher. Higher oil prices at the pump will come through in inflation reports as higher than expected inflation.
The pressure on markets is coming from these Middle East attacks ordered by Trump. This is creating signs of uncertainty in the market, but it is not the end of the world and can be overcome.
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