The Fed has missed its long-term two-percent target for inflation for more than five years, and at its last meeting in September, the FOMC voted to raise the key federal funds rate for the first time in three years, lifting the target range to 3.75 percent to 4.0 percent. The Fed’s meeting comes days ahead of key midterm elections in the United States on November 3, with the Democratic Party seeking to wrest control of both houses of Congress from US President Donald Trump’s Republicans.

Trump frequently berated and criticized Fed Chair Kevin Warsh’s predecessor, Jerome Powell, over interest rates—which he deems to be too high—but has so far refrained from targeting the man he appointed to replace him over the issue. The Fed’s preferred gauge for inflation, the Personal Consumption Expenditures (PCE) price index, hit a pandemic-era peak of 7.2 percent in 2022, before a series of interest-rate hikes tamed it to around 2.2 percent by late 2024.

Trump’s economic policies—including his upending of the global trade order using tariffs and his war on Iran—fuelled it once more, and it hit a three-year high of 3.9 percent in May. Since the United States and Israel attacked Iran in late February, global energy prices have skyrocketed, with Tehran’s retaliatory actions sharply curtailing oil and gas supplies through the Gulf. Higher energy prices have begun to cascade through into other goods and services, fuelling inflation in the United States, with prices a key issue for voters as they head to the polls.

– ‘Based on the economics’ –

Loretta Mester, former regional head of the Cleveland Fed, told AFP that the timing of the meeting just days ahead of the election would not be a factor for policymakers. “The Fed doesn’t take into account any kind of political issues in that FOMC room,” she said. “It really is based on the economics.” Mester argued that the fundamentals call for continuing to raise interest rates. “The data that’s come in continue to show a stable labor market and continue to show inflation above target,” she said, adding that there was no evidence that it was on a path downwards towards the target. “The economics would suggest then you need to continue raising rates.”

Still, she thought that most policymakers seemed keen to avoid moving too quickly, and may hold rates at this meeting, waiting to tighten the screws until the following meeting in early December. Wendy Edelberg, a senior fellow at the Brookings Institution, believes central bankers would rather not put themselves in the middle of the political debate ahead of the midterms. “It’s unhelpful for everyone if the Fed gets wrapped up in all the political discourse right before an election,” she told AFP.

Edelberg said that “there wouldn’t be huge economic implications” if policymakers raised rates in December as opposed to October. She saw such a decision less as a “nod to Trump”—who has aggressively demanded lower rates to spur economic activity—and more a way to avoid being the potential target of political barbs.

Since returning to power last year, the US president has waged an unprecedented assault on the Fed’s independence, launching a criminal probe against Powell and attempting to unseat Fed Governor Lisa Cook. The probe against Powell was dropped to smooth the way for Warsh’s Senate confirmation, but the battle to fire Cook continues despite a Supreme Court decision nullifying an earlier attempt to do so. Last week, Cook declined to attend a hearing in the White House’s probe into mortgage fraud allegations, which she denies.

– Myriam Lemetayer and Asad Hashim

© 2024 AFP

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On Wall Street, the technology-focused Nasdaq index advanced 0.5 percent to a new high, coming off a record set on Monday driven by AI enthusiasm. The S&P 500 also hit a new record after rising 0.6 percent. The brisk trading in New York stoked European stock markets, after gains across most Asian equity markets.

Oil prices were subdued as Gulf exports inched back toward pre-war levels, with the international benchmark Brent North Sea crude closing just above the psychological level of $100 a barrel. Oil’s decline “gave a boost to interest-rate sensitive stocks including real estate and consumer cyclicals,” said Dan Coatsworth, head of markets at AJ Bell.

Arne Lohmann Rasmussen, a commodities analyst with Global Risk Management, noted that “Gulf exports excluding Iran averaged 19.2 mb/d in September, equivalent to 81 percent of pre-war levels,” even though Iran is still curtailing tanker traffic through the Strait of Hormuz. But he added that “crude exports were back to 91 percent of pre-war levels, while refined product exports were only around 60 percent,” — a supply cut that has sent fuel costs soaring. In the UK, the average diesel price at the pump struck a record high last week, according to official data.

There remains plenty of uncertainty among traders over the Middle East crisis, which is putting pressure on central banks to raise interest rates to combat energy-fueled inflation. That and other factors have pushed government bond yields up to levels not seen in decades, heightening worries about ballooning debt. Analysts say the race to build out AI data centers, servers, and chips has compounded that problem, with tech titans no longer able to rely on their vast piles of cash.

Borrowing by firms including Google, Amazon, and Microsoft hit around $500 billion in the nine months since January, and Goldman Sachs expects a further ramp-up in 2027, to $1.2 trillion. “This is not something that we’ve seen before,” said Chris Della Fave, senior vice president at the fundraising advisory firm Post Oak Group, who estimates that AI accounts for 25 percent of all corporate bond issuance — up from four percent two years ago.

David Morrison, senior market analyst at Trade Nation, pointed to the fact that only the technology and energy sectors were trading higher than their 50-day moving average as being of concern. “Clearly, this is not indicative of a healthy bull market, and there is a very real danger that a crack in the AI story could see stocks across the tech sector hit an air pocket which affects everything,” he said.

Sam Stovall of CFRA Research said that US equities were buoyed by expectations of another interest rate hike in October dropping. “This week is a pretty quiet week in terms of economic reports,” he said. “And the Fed doesn’t meet until the end of the month. So investors are focusing more on technicals right now.” He added that strong earnings were expected to boost markets further.

In company news, UK online fashion giant Asos saw its share price slump more than nine percent in London trading Tuesday after customers reportedly received a mobile notification claiming its systems had been hacked. In the United States, Paramount completed its takeover of Warner Bros. Discovery, uniting two of Hollywood’s most storied studios in a media empire spanning television, news, and cinema under the control of David Ellison. Skydance stocks closed down 2.7 percent on Wall Street.

– Key figures at around 2015 GMT –

New York – Dow: UP 0.5 percent at 51,521.28 points (close)

New York – S&P 500: UP 0.6 percent at 7,818.93 (close)

New York – Nasdaq: UP 0.5 percent at 27,599.79 (close)

London – FTSE 100: UP 0.4 percent at 10,541.69 (close)

Paris – CAC 40: UP 0.5 percent at 7,868.71 (close)

Frankfurt – DAX: UP 0.8 percent at 25,449.19 (close)

Tokyo – Nikkei 225: UP 1.1 percent at 70,683.98 (close)

Hong Kong – Hang Seng Index: UP 1.0 percent at 24,280.56 (close)

Shanghai – Composite: Closed for a holiday

Euro/dollar: UP at $1.1257 from $1.1217 on Monday

Pound/dollar: UP at $1.3275 from $1.3221

Dollar/yen: UP at 158.17 yen from 157.99 yen

Euro/pound: DOWN at 84.81 pence from 84.84 pence

Brent North Sea Crude: UP 0.3 percent at $100.58 per barrel

West Texas Intermediate: FLAT at $89.44 per barrel

© 2024 AFP

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From next to nothing in 2024, tech sector borrowing has reached around $500 billion in the nine months since January, as Google, Meta, Amazon, Microsoft, and others raise debt hand over fist to finance the chips, servers, and data centers that power AI. Goldman Sachs expects a further ramp-up in 2027, to $1.2 trillion. “This is not something that we’ve seen before,” said Chris Della Fave, senior vice president at fundraising advisory firm Post Oak Group, who estimates that AI now accounts for 25 percent of all corporate bond issuance, up from 4 percent two years ago.

In inflation-adjusted terms, the AI sector is expected to borrow more this year than US cable operators did to build out the entire internet, or than railroad companies did during the 19th-century US rail boom. So far, investors have eagerly snapped up the chance to lend to the tech giants, but they have demanded returns that would have been unthinkable for such blue-chip companies not long ago. Even Meta has had to offer more than 7 percent a year, while riskier cloud data center specialists have gone above 9 percent.

The impact reaches well beyond the companies building AI — their debt is even starting to crowd out demand for the US government bonds that anchor the financial system. An investor who might otherwise buy a US Treasury bond “might decide to buy Microsoft” instead, said Mark Malek, chief investment officer at Siebert Financial, referring to the tech giant’s bonds. That shift pushes up the rates Washington pays to borrow, he explained. This adds to the other force driving up US borrowing costs: inflation, fueled by the war against Iran and high energy prices. The interest rate on 10-year US government bonds — Wall Street’s benchmark and widely seen as the most important number in global finance, setting the tone for everything from mortgages to car loans — is now above 5.30 percent, its highest level since 2002.

– ‘Sharper correction’ –

Adding to the volatility, hedge funds had piled into US government bonds like never before, holding 7 percent of all those in circulation at the end of 2025, though that share has since fallen. Hedge funds, which place big bets on markets, move their money far faster than more cautious investors such as insurers and pension funds. Even if the war and the oil situation stabilized, Della Fave said, “I wouldn’t expect the yields to dramatically reduce, to be honest, because of this influence of the AI debt situation.”

Beyond the rising cost of borrowing, some are questioning the risks of betting on an AI boom that could hit a wall, as the dot-com bubble did in 2000. Even a moderate slowdown in the frenzied pace of construction, delays on certain projects, or weaker-than-expected revenue growth could trigger a shock in financial markets, Malek warned. In late September, the Bank of England’s Financial Policy Committee warned that “the risk of a sharper correction persists,” particularly if concerns about the pace of AI development or adoption hit earnings expectations. In July, amid some second-guessing about the AI boom, the tech-heavy Nasdaq index fell nearly 7 percent.

Against this backdrop, cloud specialist Oracle is sometimes seen as a bellwether. With massive debt ($125 billion), cash reserves that shrink every quarter, and a possible delay on a huge data center project in New Mexico, several warning lights are flashing for Larry Ellison’s group. “Let’s say Oracle has a problem… They can’t pay for something,” Malek said. Trouble with its debt “could trigger contagion” across AI finance as a whole, he added.

© 2024 AFP

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Trump has launched an unprecedented assault on the Fed’s independence to set monetary policy since taking office, initiating a criminal probe into Warsh’s predecessor and attempting to fire another Fed governor in his quest for lower rates to spur economic activity. He frequently insulted and berated former chair Jerome Powell, but delivered a muted — if still extraordinary — response to Warsh’s announcement of the rate hike. Trump told reporters he spoke with Warsh before the Fed’s meeting, telling him to “do what you want” and ascribing the decision to raise rates — which the Fed chair voted for and stood by — to a “hostile board.”

Asked by a reporter if he had spoken to the president, Warsh was tight-lipped. And queried on the Fed’s independence, he again offered a tepid defence. “Part of the independence of the Federal Reserve is we stay in our lane. Independence is a two-way street,” he said, responding to a question about Trump’s threat to cut trade ties with some countries if the Fed raised rates. “We let people that do trade policy and fiscal policy stay in their lane, too,” Warsh said.

For Pao-Lin Tien, economics professor at George Washington University, Trump’s version of his conversation with Warsh will fuel the skepticism of those who question the latter’s independence. “That kind of meddling really makes people question a little bit whether the Fed chair is really completely independent,” she said. “Personally, I’m not very convinced.”

– ‘Not a reliable narrator’ –

For others, however, Warsh has been put in a difficult spot. With inflation surging to three-year highs amid the Iran war, and an aggressive president who has made it clear he will channel his anger at friends and foes alike if he does not get what he wants. David Wessel, a senior fellow at the Brookings Institution, thought Warsh managed the situation well. “He got a unanimous vote from the FOMC to raise interest rates and, apparently based on a conversation between the two men, the president doesn’t seem to blame Warsh personally for the rate hike,” he said, referring to the Fed’s interest-rate setting committee.

Still, the president’s assertion that he gave Warsh permission to vote for the hike was “very Trump-like,” he added. “We don’t know what was really said in that conversation. Warsh isn’t talking and Trump isn’t a reliable narrator,” said Wessel. “I doubt he asked Trump for permission, but maybe Trump believes he gave it.”

– ‘Steel in his spine’ –

What is clear to many economists is that a rate hike was needed. Inflation has been above the Federal Reserve’s two-percent target for more than five years, with US households and businesses battered by high prices since the pandemic. Inflation had been on a downward trajectory, but prices have surged in the wake of Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. Since taking office in May, Warsh has made it clear he was focused on the high prices. “The plain fact is that inflation is too high, and has been for too long,” he told reporters on Wednesday.

The White House insists that any inflation is due to the previous administration, with Trump advisor Kevin Hassett saying earlier this week that there was no need for a rate hike to tackle it. Warsh, however, had a different view, saying that inflation data over the summer did not suggest that price rises were transitory. For Tien, the Fed’s decision to raise rates may have defied Trump’s demands, but it does not necessarily mean much for its independence. “Inflation has been so high for so long that it will be very hard to make an argument to not raise rates,” she said.

Many in financial markets, however, cheered Wednesday’s decision as establishing Warsh’s credibility in going against the White House’s wishes. “Warsh has shown that he has steel in his spine by increasing interest rates seven weeks before the midterm elections,” wrote economist Michael Strain in the Financial Times.

– Asad HASHIM and Myriam LEMETAYER

© 2024 AFP

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And Wednesday’s rate hike may not be the last — the vast majority of Fed policymakers indicated that at least one more rate hike was likely necessary before the end of the year, according to their Summary of Economic Projections (SEP). US households and businesses have been battered by years of higher-than-target inflation, and prices have surged in the wake of Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. The US president reacted angrily to the decision Wednesday, calling it a “raise against Trump” and accusing the Fed’s rate-setting committee — which he called “hostile” — of making decisions for political reasons. The president has launched an unprecedented assault on the Fed’s independence since taking office, attempting to fire a Fed Governor and launching a criminal probe against Warsh’s predecessor in his quest for lower rates to spur economic activity.

Wednesday’s statements refrained from directly insulting or criticizing Warsh, as Trump was wont to do with former Fed chair Jerome Powell. Trump’s Republican Party faces a stern test in upcoming midterm elections, with rival Democrats seeking to wrest control of both houses of Congress and economic issues front-and-center for voters.

**- Growing calls for hike -** The Fed had held rates steady since January, choosing to wait to gauge the effects of the Iran war’s energy price shocks and to let the impact of tariffs on prices ripple through the economy. Since July, however, a growing faction of policymakers had indicated a rate hike may be required to tame inflation, as the war grinds on and prices remained elevated, particularly for energy. On Friday, August’s consumer price index came in at 3.4 percent — unchanged from the month before, but still well above the Fed’s long-term two-percent target. Diane Swonk, chief economist at KPMG, said inflation had “forced the Fed’s hand.” “Price pressures remain too elevated and too persistent for policymakers to look through, while the economy and labor market have held up well enough to absorb tighter policy,” she said.

In its SEP, the Fed raised its forecast for its preferred gauge of inflation — the Personal Consumption Expenditures (PCE) price index — by 0.1 percentage points to 3.7 percent by year-end. The Fed also raised its projection for GDP growth by year-end to 2.3 percent, up 0.1 percentage points. Warsh reiterated his belief in the “resilience” of the US economy, citing its strength as being a marker of its ability to absorb tighter financial conditions.

**- ‘Rather unfortunate’ -** US stock markets largely priced in Wednesday’s rate hike, but they were still down on the news — expected with any rate hike as investors adjust their portfolios. Yields on 10-year US Treasury bonds — which have surged in recent days as uncertainty on long-term inflation has spiked — were also up past the five-percent threshold, a sign that uncertainty remains a factor. Warsh was named to his position after a contentious Senate confirmation process, during which Democratic lawmakers accused him of being a “sock puppet” for Trump, which he denied.

The Fed has a dual mandate to deliver maximum employment while keeping inflation to its long-term two-percent target. It mainly achieves these goals by setting the key US interest rate — lower rates tend to spur economic activity but fuel inflation, and hiking them cools both activity and prices. The Fed’s SEP showed that at least 12 of 18 policymakers who participated in the projection expected one more rate hike would be required before the end of the year. Four policymakers expect two more rate hikes to be required. Warsh has criticized the Fed’s policy of offering such projections in the past and did not participate in the previous iteration in June. This projection also included only 18 policymakers, suggesting he had once again withheld his contribution.

© 2024 AFP

The post US Fed raises rates to tackle ‘too high’ inflation, irking Trump appeared first on MagnifyPost.com.

The Fed last raised rates in 2023, when the central bank was still battling post-pandemic inflation. Fed Chair Kevin Warsh will address a press conference following the announcement. The US economy has been dealing with years of higher-than-target inflation, and prices have surged in the wake of Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the impact of tariffs on prices ripple through the economy. At its last meeting in July, however, a quarter of the committee’s voting members dissented from the decision to hold pat, calling for an immediate hike.

Since then, other policymakers — including Warsh — had hinted that if inflation did not meaningfully slow, the Fed may need to intervene. On Friday, August’s consumer price index came in at 3.4 percent — unchanged from the month before, but still well above the Fed’s long-term two-percent target. In its SEP, the Fed raised its forecast for its preferred gauge of inflation — the Personal Consumption Expenditures (PCE) price index — by 0.1 percentage points to 3.7 percent by year-end. Inflation “has spread across the economy and is becoming embedded in consumer and firm behavior — exactly what the Fed must prevent,” said Diane Swonk, chief economist at KPMG, in a note before the Fed’s decision was announced. The Fed also raised its projection for GDP growth by year-end to 2.3 percent, up 0.1 percentage point.

– Political implications –

Markets, which had largely priced in Wednesday’s rate hike, welcomed the decision without showing much movement on Wall Street’s main indexes. Yields on 10-year US Treasury bonds — which have surged in recent days as uncertainty on long-term inflation has spiked — were also little changed. The fresh hike will be sure to anger Trump, who has launched an unprecedented campaign to pressure the independent central bank to lower rates in order to spur economic activity. The Trump administration launched a criminal probe against Warsh’s predecessor Jerome Powell — whom the president regularly insulted and berated — and is still trying to fire Fed Governor Lisa Cook.

On Tuesday, key Trump economic advisor Kevin Hassett advocated against a rate hike but said the White House would “understand and respect the decision.” Warsh was named to his position after a contentious Senate confirmation process, where Democratic lawmakers accused him of being a “sock puppet” for Trump, which he denied. So far, Trump has supported Warsh, claiming that the Fed chair wants lower rates and accusing the board of being “political.” The Fed has a dual mandate to deliver maximum employment while keeping inflation to its long-term two-percent target. It mainly achieves these goals by setting the key US interest rate — lower rates tend to spur economic activity but fuel inflation, and hiking them cools both activity and prices.

The Fed’s SEP showed that at least 12 of 18 policymakers who participated in the projection expected one more rate hike would be required before the end of the year. Four policymakers expect two more rate hikes to be required. Warsh has criticized the Fed’s policy of offering such projections in the past and did not participate in the previous iteration in June. This projection also included only 18 policymakers, suggesting he had once again withheld his contribution.

– Asad HASHIM and Myriam LEMETAYER

© 2024 AFP

The post US Fed raises rates to battle inflation in move likely to rile Trump appeared first on MagnifyPost.com.

The US economy has been dealing with years of higher-than-target inflation, and prices have surged in the wake of President Donald Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the impact of tariffs on prices ripple through the economy. At its last meeting in July, however, a quarter of the committee’s voting members dissented from the decision to hold pat, calling for an immediate hike.

Since then, other policymakers — including Warsh — have hinted that if inflation does not meaningfully slow, the Fed may need to intervene. On Friday, August’s consumer inflation index came in at 3.4 percent — unchanged from the month before, but still well above the Fed’s long-term two-percent target. The data fueled market expectations of a rate hike at this week’s meeting, with investors giving it a probability of more than 92 percent, as per CME’s FedWatch tool. “It is an about-face, but not a surprise. Inflation is still well above the two-percent target,” said Diane Swonk, chief economist at KPMG. “It has spread across the economy and is becoming embedded in consumer and firm behavior — exactly what the Fed must prevent.”

– Battling for credibility –

The Fed last raised rates in 2023, when the central bank was still battling post-pandemic inflation. Such a move Wednesday will be sure to anger Trump, who has launched an unprecedented campaign to pressure the independent central bank to lower rates in order to spur economic activity. The Trump administration launched a criminal probe against Warsh’s predecessor Jerome Powell — who the president regularly insulted and berated — and is still trying to fire Fed Governor Lisa Cook.

On Tuesday, key Trump economic advisor Kevin Hassett advocated against a rate hike but said the White House would “understand and respect the decision” if that is what occurs. Warsh was named to his position after a contentious Senate confirmation process, where Democratic lawmakers accused him of being a “sock puppet” for Trump, which he denied. Now, analysts say, Warsh would prove his credibility by backing a rate hike that the US president is sure to oppose. So far, Trump has supported Warsh, claiming that the Fed chair “wants” lower rates and accusing the board of being “political.”

David Wessel, a senior fellow at Brookings, told AFP that if the Fed does deliver a rate hike, there is a chance that Trump intensifies those attacks. “There’s the risk that the administration will decide that Kevin’s hand is being forced by some hawkish people on the committee, and so they’ll redouble their efforts to get rid of some of them.”

– ‘Reality’ –

Claudia Sahm, chief economist at investment firm New Century Advisors, said it was an “unfortunate” situation. “You shouldn’t have to prove yourself by inflicting Americans with higher mortgage rates. But it is kind of the reality of this situation,” said Sahm, who previously worked at the Fed. The Fed has a dual mandate to deliver maximum employment while keeping inflation to its long-term two-percent target. It mainly achieves these goals by setting the key US interest rate — lower rates tend to spur economic activity but fuel inflation, and hiking them cools both activity and prices.

– Asad HASHIM and Myriam LEMETAYER

© 2024 AFP

The post US Fed to deliver rate decision with markets betting on hike appeared first on MagnifyPost.com.

The world’s largest economy has been dealing with years of higher-than-target inflation, and prices have surged in the wake of US President Donald Trump’s war on Iran, his signature tariff policies and the ongoing AI boom. The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the tariffs’ effects on prices ripple through the economy.

In recent weeks, however, several Fed policymakers — including Warsh himself — have hinted that if inflation does not show clear signs of slowing, the central bank will have to act by raising interest rates. On Friday, new data on consumer inflation for August showed it remaining steady at 3.4 percent — no change from the month before, but still well above the Fed’s long-term two percent target. Market expectations of a 25-basis-point rate hike on Wednesday surged after the release of the data, with the probability at more than 85 percent according to CME’s FedWatch tool. The Fed last raised rates three years ago, when it was fighting surging inflation in the wake of the pandemic. They currently stand at between 3.50 and 3.75 percent.

Trump has railed against the Fed over interest rates since taking office for his second term, launching unprecedented attacks on the central bank’s independence as he demands lower rates to spur economic activity. Speaking on CNN on Sunday, Kevin Hassett, Director of the National Economic Council at the White House, said that he and Trump “think that there isn’t a reason right now to raise rates,” and claimed “progress” on inflation despite the key statistic remaining high. Hassett invoked former Fed Chair Alan Greenspan, who was widely known for his faith in markets’ ability to sort themselves out, saying “it’s pretty important for the Fed to just leave things alone ahead of an election to preserve its independence.” Americans will vote in midterm elections in November, which could shift the balance of power in Congress.

The US president launched a criminal probe against previous Fed chair Jerome Powell, is attempting to fire another Fed governor and has even threatened to cut trade ties with certain countries if the Fed raised rates. Warsh was appointed by Trump and analysts say this is his first real test since taking office: Will the Fed raise rates to combat inflation, or hold steady in line with what the White House prefers? “This is the test. This is what comes with that job, and now he has to decide how to handle it,” said David Wessel, senior fellow at the Brookings Institution. “He’s either going to completely disappoint the markets, or he runs the risk that he’s going to start to anger Donald Trump.”

The Fed’s Federal Open Market Committee, with its 12 voting members, will announce its decision after a two-day meeting on Wednesday at 2:00 pm (1800 GMT).

– ‘Costly medicine’ –

“It’s quite likely that the Fed will raise interest rates next week,” said Claudia Sahm, chief economist at investment firm New Century Advisors who previously worked at the Fed. But “it’s not a done deal,” she cautioned in comments to AFP. “This is a difficult decision for them to make.” Raising interest rates would increase borrowing costs across the board for the US economy, acting as a brake on further investment and consumption activity. Sahm warned such a move was “not a magic wand and it is a costly medicine.” She said the Fed could still hold rates steady rather than administer that medicine, but it would have to explain its decision clearly to markets. “If they surprise markets and they can’t explain why they’re surprising markets, then Wednesday afternoon will be pretty messy,” she said.

Warsh has advocated in the past for lower interest rates due to expected productivity gains from AI technology, but in recent weeks he has doubled down on the Fed’s mandate to bring inflation down. “There’s always been this doubt about whether Kevin Warsh is going to be like his predecessors and do what’s right for the economy, even if it’s politically inconvenient,” said Wessel of Brookings. “If he raises rates now and Trump goes ballistic, he will have established his credibility as an independent Fed chair for the rest of his term.”

– Myriam LEMETAYER and Asad HASHIM

© 2024 AFP

The post ‘This is the test’: All eyes on US Fed to tackle high inflation appeared first on MagnifyPost.com.

The world’s largest economy has been dealing with years of higher-than-target inflation, and prices have surged in the wake of US President Donald Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the tariffs’ effects on prices ripple through the economy.

In recent weeks, however, several Fed policymakers — including Warsh himself — have hinted that if inflation does not show clear signs of slowing, the central bank will have to act by raising interest rates. On Friday, new data on consumer inflation for August showed it remaining steady at 3.4 percent — no change from the month before, but still well above the Fed’s long-term two percent target.

Market expectations of a 25-basis-point rate hike on Wednesday surged after the release of the data, with the probability at more than 85 percent according to CME’s FedWatch tool. The Fed last raised rates three years ago, when it was fighting surging inflation in the wake of the pandemic. They currently stand at between 3.50 and 3.75 percent.

Trump has railed against the Fed over interest rates since taking office for his second term, launching unprecedented attacks on the central bank’s independence as he demands lower rates to spur economic activity. Speaking on CNN on Sunday, Kevin Hassett, Director of the National Economic Council at the White House, said that he and Trump “think that there isn’t a reason right now to raise rates,” and claimed “progress” on inflation despite the key statistic remaining high.

Hassett invoked former Fed Chair Alan Greenspan, who was widely known for his faith in markets’ ability to sort themselves out, saying “it’s pretty important for the Fed to just leave things alone ahead of an election to preserve its independence.” Americans will vote in midterm elections in November, which could shift the balance of power in Congress.

The US president launched a criminal probe against previous Fed chair Jerome Powell, is attempting to fire another Fed governor, and has even threatened to cut trade ties with certain countries if the Fed raised rates. Warsh was appointed by Trump, and analysts say this is his first real test since taking office: Will the Fed raise rates to combat inflation, or hold steady in line with what the White House prefers?

“This is the test. This is what comes with that job, and now he has to decide how to handle it,” said David Wessel, senior fellow at the Brookings Institution. “He’s either going to completely disappoint the markets, or he runs the risk that he’s going to start to anger Donald Trump.”

The Fed’s Federal Open Market Committee, with its 12 voting members, will announce its decision after a two-day meeting on Wednesday at 2:00 pm (1800 GMT).

– ‘Costly medicine’ –

“It’s quite likely that the Fed will raise interest rates next week,” said Claudia Sahm, chief economist at investment firm New Century Advisors who previously worked at the Fed. But “it’s not a done deal,” she cautioned in comments to AFP. “This is a difficult decision for them to make.”

Raising interest rates would increase borrowing costs across the board for the US economy, acting as a brake on further investment and consumption activity. Sahm warned such a move was “not a magic wand and it is a costly medicine.” She said the Fed could still hold rates steady rather than administer that medicine, but it would have to explain its decision clearly to markets.

“If they surprise markets and they can’t explain why they’re surprising markets, then Wednesday afternoon will be pretty messy,” she said. Warsh has advocated in the past for lower interest rates due to expected productivity gains from AI technology, but in recent weeks he has doubled down on the Fed’s mandate to bring inflation down.

“There’s always been this doubt about whether Kevin Warsh is going to be like his predecessors and do what’s right for the economy, even if it’s politically inconvenient,” said Wessel of Brookings. “If he raises rates now and Trump goes ballistic, he will have established his credibility as an independent Fed chair for the rest of his term.”

– Myriam LEMETAYER and Asad HASHIM

© 2024 AFP

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But such a move is sure to draw the ire of President Donald Trump, who has pushed for rate cuts as he faces pressure from voters worried about high costs of living as the midterm elections approach. Trump has called for lower interest rates this month, even making a surprise threat to cut trade ties with certain countries otherwise. Friday’s report “will seal the deal for a Fed rate hike in September,” Navy Federal Credit Union chief economist Heather Long told AFP. “If the data comes in in line with expectations, or certainly any higher than expectations, a hike is a definite,” she believes.

EY Parthenon chief economist Gregory Daco expects policymakers will focus on “core” inflation, which excludes volatile food and energy prices, as they make their rate decisions. Others like KPMG chief economist Diane Swonk anticipate the Fed is likely to raise short-term interest rates before year-end despite “intensifying political pressure to cut.” Economists expect consumer inflation to come in at 3.4 percent year-on-year in August, according to a forecast published by MarketWatch. This would be the same rate as in July, but still significantly above the Fed’s longer term 2.0 percent inflation target.

Consumer prices have risen since US-Israel strikes targeting Iran from late February. Global energy prices surged as Tehran retaliated by choking off the Strait of Hormuz—a key waterway for energy transit—sending costs up at US gasoline pumps too. This has lifted household expenditures and raised business costs as diesel prices hit new records, making transportation, farming, and construction pricier. The situation weighs on the Fed, which generally cuts rates to boost the economy and lifts them to curb inflation.

While the central bank has gradually lowered rates since 2024, it held them steady at a range between 3.50 percent and 3.75 percent this year as inflation climbed following the Middle East war. The last rate hike was in mid-2023, and traders see a 71.4 percent chance that the Fed will opt for a quarter-point hike next week, according to CME Group’s FedWatch tool. Several Fed policymakers have signaled that they would be open to raising rates if August’s data does not show a continuing downward trend.

“Everything that’s happened since the last Fed meeting in July has escalated the inflation scare,” Long said. A month or two ago, there was optimism the Iran war would end and that the effects of Trump’s tariffs would fade, she said. But since then, the conflict has held at a stalemate and oil prices have gone back above $100 a barrel. The United States meanwhile is spiraling into a trade war with Canada, its second biggest trading partner.

“The biggest sign of how worried the White House is, is President Trump pledging to do a $5,000 dividend,” Long said. With Trump’s approval rating languishing on persistent inflation and the unpopular war with Iran, the president on Wednesday promised a $5,000 “dividend” to every American adult if Republicans retained both chambers of Congress in November’s midterm elections. “That’s (officials) trying to address the affordability crisis that many Americans feel right now,” Long said.

– Beiyi SEOW

© 2024 AFP

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