Expectations that the U.S. Federal Reserve will raise its benchmark interest rate at its two-day meeting starting on the 15th have climbed above 86%. With President Donald Trump repeatedly calling for rate cuts, the chances of a deeper conflict have grown as Fed Chair Kevin Warsh has also shifted to a hawkish stance.
Warsh faces pressure to raise rates ahead of the Federal Open Market Committee meeting on the 15th and 16th, Bloomberg reported on the 14th. Most market participants expect a September increase after international crude oil futures topped $100 a barrel and the core consumer price index rose 0.3% in August from the previous month, exceeding market forecasts of 0.2%. On the Chicago Mercantile Exchange, the probability of a 0.25 percentage point increase in September stands at 86.2%. Major Wall Street institutions including TD Bank and JPMorgan Chase also revised their forecasts to call for a rate increase this week after Friday's inflation data.
The clash with Trump takes shape at this point. The president recently threatened to widen his trade war unless policy is eased, and on the 13th he repeated his argument that U.S. borrowing costs should be the lowest in the world. Asked whether he expected the Fed to raise rates at this meeting, however, he said he did not know.
Pressure for easing is intensifying because of political anxiety inside the White House. Polls show voter frustration over rising living costs has grown ahead of the midterm elections. Even if rate cuts take months to show up in actual mortgage or credit card bills, they could give Trump grounds to signal that relief from economic strain is on the way.
Warsh's options are narrow. Heather Long, chief economist at Navy Federal Credit Union, said Warsh cannot win politically right now, noting that a hike draws tweets while a hold draws a backlash from markets. Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, said it is a no-win situation in which he either angers the president or loses credibility in markets, adding that Warsh would not want to be remembered as a chair who yielded to administration pressure at a moment when the Fed's mandate was at stake.
Conditions inside the Fed are another variable. At the July meeting, three policymakers dissented in favor of raising rates. Given recent data, Warsh's standing among colleagues could weaken if he tries to block an increase.
Signals from the White House are mixed. Kevin Hassett, director of the National Economic Council, said on Bloomberg TV on Friday that the president still wants lower rates and that he would have something to say if the Fed raises them. Hassett softened his remarks somewhat on Fox News Sunday on the 13th, saying the president would not be very happy about a rate increase but would above all defend Warsh's independence.
Era of Ultra-Low Rates Fades in Japan as Global Hikes Begin This Week
Following the European Central Bank last week, central banks in Japan, the United Kingdom and Taiwan are expected to raise benchmark rates in a domino effect this week. Energy prices driven up by war in the Middle East and surging costs tied to the artificial intelligence boom are fueling inflation. The ECB raised its three key policy rates by 0.25 percentage point each on the 10th.
The probability that the Bank of Japan will raise its rate from 1.00% to 1.25% at its monetary policy meeting on the 18th is put at 98%. That would bring the central bank, which has long maintained ultra-low rates, to its highest level in 31 years, since 1995. Kazuyuki Masu, a Bank of Japan policy board member, said at a recent briefing that rates are lower than inflation and that the benchmark should be pulled up into the neutral rate range of 1.1% to 2.5%, warning that otherwise companies will concentrate excessive investment and property prices will jump.
For the Bank of England, markets see a hold as the more likely outcome. But with officials inside the bank continuing to argue for increases, some expect consecutive rate hikes at future meetings. Analysts said that if more than 10 countries including the United Kingdom, Brazil, Taiwan and Pakistan raise rates in succession this week, higher interest burdens could curb private consumption and corporate investment, cooling the global economy.
