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Wash's hawkish remarks at Jackson Hole: "We have work to do"
"Fed's credibility will be damaged if there's no rate hike"
Hassett: "Trump won't be pleased if there's a hike"
Market sees 92% chance of rate hike
Ahead of the U.S. Federal Reserve's (Fed) benchmark interest rate decision meeting, attention is focused on the possibility of Fed Chairman Kevin Wash clashing directly with President Donald Trump, who appointed him.
This is because while President Trump has repeatedly pressed for interest rate cuts, the Fed's likelihood of raising rates to curb inflation has significantly increased.
The Fed will hold a Federal Open Market Committee (FOMC) meeting on September 15-16 (local time) to decide whether to raise the benchmark interest rate.
According to the CME FedWatch Tool, the federal funds futures market is pricing in a 92% probability of a 0.25 percentage point rate hike at this meeting. This is a significant increase from around 50% at the beginning of last week, effectively making a rate hike almost certain.
This reflects the fact that the August Consumer Price Index (CPI) inflation rate, announced on the 11th, remained at 3.4%, the same as July, and international oil prices continued their high trajectory, exceeding $100 per barrel again, showing no signs of inflation subsiding.
Michael Feroli, an economist at JP Morgan, pointed out, "Given that Chairman Wash has repeatedly issued strong warnings that he will not tolerate inflation, the Fed's credibility could be undermined if there are no policy actions to back this up."
Wash's most recent remarks, who has generally avoided commenting on monetary policy direction, were made at the Jackson Hole speech on August 30.
Wash stated, "My standard is this: I need to be confident that underlying inflation is moving clearly and sufficiently toward our target. If not, we have work to do."
The market largely interpreted these remarks as hawkish (monetary tightening).
However, conducting a rate hike now, just seven weeks before the November midterm elections, could also be a burden for the Fed, as it risks angering President Trump.
On the 13th, when asked if he expected the FOMC to decide on a rate hike on September 15-16, President Trump replied, "I don't know."
He then reiterated his preference for lower interest rates, saying, "The U.S. economy is so strong that regardless of their (the Fed's) formula, we should have the lowest interest rates in the world."
President Trump has maintained the stance that interest rates should be lowered for economic growth, and he nominated Wash as Fed Chairman in January of this year as someone who would well reflect his views.
When former Fed Chairman Jerome Powell did not lower interest rates quickly, Trump once strongly criticized him as an 'idiot.'
Kevin Hassett, Chairman of the White House National Economic Council (NEC), said in an interview with Fox News on the 13th,
when asked if President Trump would accept an FOMC rate hike, "President Trump 100% respects the independence of Fed Chairman Kevin Wash," adding, "Whatever decision Wash and the Fed make, we will support it 100%."
However, he also warned, "If there is a rate hike this time, Trump will…well, as everyone knows, he won't be very pleased."
He also added, "If you want an independent Fed, one of the things the Fed should do is not interfere with elections." This indicated that a rate hike would be a major negative factor for President Trump in the midterm elections.
Nevertheless, it appears highly likely that the Fed will raise interest rates this time.
Roger Ferguson, former Vice Chairman of the Fed, projected in an interview with CNBC, "Looking at the indicators, it's much more likely that the Fed will take action this week than not."
He stated, "If Chairman Wash and the Fed governors want to maintain the Fed's credibility, all signs point to September as the time for action."
David Mericle of Goldman Sachs pointed out, "The Fed will be concerned about the market's reaction if it doesn't raise rates, given that the market has recently almost taken a rate hike as a given."
He added, "Chairman Wash's Jackson Hole speech instilled expectations in the market that there would be a rate hike if inflation data wasn't perfect, and while this CPI result may not have been alarming, it certainly wasn't 'perfect'."
There is also a possibility that even if the Fed raises interest rates, President Trump may not strongly criticize Chairman Wash.
On August 31, President Trump met with reporters in the Oval Office and stated that he believes current interest rates are "too high," but also indicated that he would "not unconditionally oppose" Chairman Wash raising rates to curb inflation.
He said, "Chairman Wash will do what he has to do," and also expressed "great respect" for Chairman Wash.
President Trump then pointed out that "Chairman Wash could be blocked by a political and hostile FOMC." This acknowledges that the interest rate decision is not made solely by Chairman Wash, and if the opinions of the other FOMC members lean towards a rate hike, Wash cannot be blamed.
Gregory Daco, Chief Economist at EY Parthenon, said, "Delaying a rate hike until after the midterm elections, or implementing tightening solely for the sake of the Fed's credibility, is not and should not be a topic of discussion for the Fed." He added, "Chairman Wash is likely to use the majority opinion as justification to lead the situation from behind the scenes and cast a vote in favor of a rate hike."
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