NEW YORK — With the midterm elections set for November 3, President Donald Trump has turned up the pressure on multiple fronts as instability in the Middle East and inflation concerns drive U.S. gasoline prices sharply higher and Treasury prices sharply lower. He has told the refining industry to bring down fuel prices and urged Federal Reserve Chair Kevin Warsh to cut the benchmark interest rate. Oil prices and interest rates bear directly on household budgets, and Trump appears increasingly pressed for time. The problem is that such artificial measures may carry economic side effects. Compounding matters, the war against Iran — the root cause of the inflation — has sunk back into a quagmire with the resumption of armed exchanges, leaving the outlook difficult to read even a step ahead.
U.S. August Gasoline Tops $4 All Month for First Time on Record; Renewed Military Clashes in Hormuz Push Crude Higher Again
The average U.S. gasoline price stood at $4.08 on the 31st, according to The Associated Press and AAA. It is the first time the national average has remained above $4 a gallon for an entire month of August. The previous August high was set in August 2022, during the COVID-19 pandemic. AAA said rising crude oil prices are driving the increase in the national average.
U.S. gasoline prices have climbed this high because traffic through the Strait of Hormuz, which had handled roughly 20% of global crude shipments, was disrupted following the Middle East war. As recently as February 28, just before U.S. and Israeli airstrikes on Iran, U.S. gasoline was only in the $2-a-gallon range. The average U.S. retail diesel price has also jumped 57% this year, according to AAA. Global oil prices surged nearly 3% on the 31st on news that the United States and Iran had resumed military clashes in the Strait of Hormuz. On the ICE Futures Exchange in London, Brent crude for October delivery closed at $90.49 a barrel, up 2.71% from the previous session, while West Texas Intermediate for October delivery on the New York Mercantile Exchange rose 2.83% to $85.76 a barrel. On the 30th, U.S. forces struck two rocket launchers used by the Islamic Revolutionary Guard Corps to lay mines on Iran's Larak Island. Iran retaliated on the 31st against Jordan and the United Arab Emirates, where U.S. military bases are located. In a Fox News interview that day, Trump said of Iran's attack on the U.S. base in Jordan that there would be a response and that the United States would strike hard. On Truth Social, his social media platform, Trump said Iran is a failed state and completely dead. He said Iran has no navy and no air force, has no currency and is not paying its soldiers or police, and claimed that inflation there has reached 300% and that the leadership has fallen into complete disarray, without the capacity to properly represent the country.
While he insists day after day that Iran has been subdued militarily and economically, the general assessment in diplomatic circles and on Wall Street is that rising U.S. gasoline prices could deal Trump a politically fatal blow. With gasoline prices refusing to settle ahead of the midterms, Trump has decided to bring executives from small and mid-sized refiners and distributors, not just the majors, to the White House in Washington on the 1st of next month. Interior Secretary Doug Burgum and Energy Secretary Chris Wright are also expected to attend. Deputy White House press secretary Taylor Rogers said Trump is committed to ensuring that his successful energy dominance agenda translates into maximum savings at the pump, and that he will work with the executives to find the best ways to expand refining capacity and lower prices for the American people.
Earlier, on the 3rd of this month, Trump had criticized major oil companies including Chevron and Exxon Mobil, saying he did not like that they were making so much money amid a supply shortage and that they should return part of their profits to the public. On the 28th, he sought to reassure voters by declaring that the United States had secured majority control over Venezuela's 65 billion barrels of oil reserves. Washington announced an agreement to develop 17 oil fields in Venezuela, which holds 65 billion barrels of crude, and to take 55% of output. That is more than U.S. oil reserves of 46 billion barrels. The Environmental Protection Agency also raised the volume of renewable fuel blending exemptions for refiners to 1.76 billion credits a year, up from the 990 million credits initially signaled. The renewable fuel blending mandate requires that set amounts of ethanol and biodiesel be mixed into gasoline and diesel.
Facing Elections, Trump Summons All Refining Executives to White House; Reaches Drug Price Deal With Pharmaceutical Firms
Trump continued his remarks on Venezuelan oil at the White House on the 31st. On reports that Venezuela, a founding member of the Organization of the Petroleum Exporting Countries, could withdraw from the group, he distanced himself, saying it was up to them. Venezuela's output had plunged under U.S. sanctions and was therefore not constrained by OPEC limits, but if the oil deal with the Trump administration lifts production, OPEC quotas could become a constraint. Apparently mindful of domestic opposition to the deal within Venezuela, Trump stressed that it was a very good deal for Venezuela as well. He said U.S. major oil companies are moving in and everyone is bidding, and praised the shift as China and Russia leaving and the world's most powerful and wealthiest companies coming in.
Trump went on to say that day that he had reached agreements with nine pharmaceutical companies to lower drug prices. Under the deals, prices for those companies' key medicines will fall to most-favored-nation levels. Trump said Americans had been paying the highest drug prices in the world, that the drugmakers had been ripping the country off, and that Americans would now pay the lowest prices.
Trump's election-season pressure on cost-of-living issues extended to the Fed. Asked whether he opposed Warsh's suggestion of a rate increase, Trump said no, drawing a line for the moment. He said he has a lot of respect for Warsh and that Warsh will do what he has to do, but stressed that U.S. rates are too high and should be the lowest in the world. Trump added that inflation stems from causes other than success and growth, and that when the country is doing well there is no need to raise rates and in many cases they should be cut. In a keynote address on the 28th at the Fed's economic policy symposium in Jackson Hole, Wyoming, Warsh said policymakers must be confident that underlying inflation is moving toward their goal at a clear and sufficient pace, and that otherwise they will do what they have to do. Wall Street read the remarks as effectively signaling the possibility of a rate increase.
Long-dated Treasury yields stirred again in the bond market on the 31st. The yield on the 10-year U.S. Treasury note, the global bond market benchmark, topped 4.75% during the session, its highest in one year and seven months, since January of last year. The 30-year yield also climbed as high as 5.26% intraday.
At the opening plenary session of the Group of 20 finance ministers and central bank governors meeting in Asheville, North Carolina, the same day, Warsh said that if he had to define this moment, it could be called a period of a global investment surge. His assessment was that the global economy has moved out of the earlier era of a savings glut and into an era of an investment surge. Warsh said the global savings glut had been a central topic at G20 meetings dating back to before the 2008 global financial crisis, and argued that the situation has reversed and the new period looks closer to long-term growth.
As Treasury Prices Slide, Indirect Easing Pressure on Warsh; Bessent Hints at Japanese Rate Hike
With Treasury yields flashing warning signs, Treasury Secretary Scott Bessent indicated that Japan could raise interest rates further. In a CNBC interview during the G20 meeting, Bessent said, on the yen's renewed weakness, that he believes the Japanese government and the Bank of Japan will do something that leads to a stronger yen. Asked whether he meant a rate increase by the Japanese central bank, Bessent said market participants have already priced it in. Asked about the effect of U.S. and Japanese intervention in the yen-dollar market, he said the authorities cannot affect the natural equilibrium and are only signaling what they are able to do, adding that he has information the market does not have.
The remarks were taken as signaling that the Bank of Japan could raise rates once more at its meeting on the 17th and 18th of next month. The yen has remained weak even after the unusual currency purchases carried out by the U.S. and Japanese governments beginning on the 31st of last month. The yen, which had fallen to about 164 per dollar just before the intervention, a 40-year low, weakened again this month and moved back past the psychological resistance level of 160. Reuters reported that the Bank of Japan is considering raising rates more aggressively than its current pace of roughly twice a year, even after its September meeting.
On the 27th, Bessent sent a letter to Democratic Senator Elizabeth Warren, who had asked for the legal basis for the Treasury's use of the Exchange Stabilization Fund in buying yen, and openly acknowledged that the measure was aimed at curbing the rise in U.S. Treasury yields, saying that disorderly conditions in the yen market could ultimately raise borrowing costs for American households and businesses. The policy grew out of a plan to prop up the dollar and U.S. Treasuries by halting the yen's slide. On the 19th, Bessent also abruptly announced a doubling of long-dated Treasury buybacks to at least $4 billion per operation from $2 billion.
A global bond selloff spread as U.S. rate policy went its own way, and Europe's bond market took a direct hit. The German 10-year yield jumped to 3.312% intraday on the 31st, its highest in 15 years, since May 2011 during the European fiscal crisis. The French 10-year yield also rose the same day to 4.163%, the highest since November 2008. The bond market has already priced in the possibility of a further rate increase by the European Central Bank next month. Investors expect the ECB to raise its deposit rate, currently 2.25%, on the 10th of next month and once more thereafter, taking it to 2.70% by year-end. Two-year yields, which are sensitive to monetary policy, rose to 2.916% in Germany and 3.112% in France. Despite concerns about a European downturn, the ECB raised its policy rate in June for the first time in two years and nine months to counter signs of inflation stemming from the Middle East.
Reuters reported on the 30th that European central bankers had lost confidence, in the wake of the Fed's Jackson Hole meeting, in the practice of coordinating monetary policy with the United States. The yen-dollar intervention and the expanded buybacks were all separate Trump administration measures unrelated to the Fed. Officials were said to have reacted with particular anger to the fact that the U.S. Treasury sold euros rather than dollars in the course of buying yen, without giving Europe advance notice.
Wall Street judges that Trump's anxiety is mounting ahead of the midterms, and expects further strained attempts to lower consumer prices and the federal government's interest burden. What bears watching is whether the policies that emerge in the process damage normal corporate activity and market order. A string of policy overreaches by Washington could inflict unexpected damage on the economies of Europe and Japan, and on South Korea as well, making it necessary to watch the Trump administration's election-driven moves closely.
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