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Wash's hawkish remarks at Jackson Hole: "We have work to do"
"Fed's credibility will be damaged if there is no rate hike"
Hassett: "Trump won't be pleased if there's a hike"
Market sees 92% chance of rate hike
Interest is growing in the possibility of Federal Reserve (Fed) Chairman Kevin Wash clashing head-on with President Donald Trump, who appointed him, ahead of the Fed's benchmark interest rate decision meeting.
This is because President Trump has repeatedly pressed for interest rate cuts, but the Fed's likelihood of raising interest rates to curb inflation has significantly increased.
The Fed will hold a Federal Open Market Committee (FOMC) meeting on the 15th-16th (local time) to decide whether to raise the benchmark interest rate.
According to the CME FedWatch Tool, the federal funds rate futures market is pricing in a 92% probability of a 0.25 percentage point increase in the benchmark interest rate at this meeting. This is a significant increase from around 50% at the beginning of last week. It's an expectation that a rate hike is almost certain.
This reflects the fact that the consumer price index (CPI) growth rate for August, announced on the 11th, remained at 3.4% (the same as July), and international oil prices continued their upward trend, exceeding $100 per barrel again, showing no signs of inflation subsiding.
JP Morgan economist Michael Feroli pointed out, "Given that Chairman Wash has repeatedly issued strong warnings that he will not tolerate inflation, if there are no policy measures to back this up, the Fed's credibility could be undermined."
Wash's most recent remarks, who has avoided commenting on the direction of monetary policy, were at the Jackson Hole speech on August 30.
Wash said, "My standard is this: I must be confident that the underlying inflation rate is moving clearly and sufficiently towards our target. Otherwise, we have work to do."
The market largely interpreted these remarks as hawkish (monetary tightening).
However, implementing an interest rate hike 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 benchmark interest rate hike on the 15th-16th, President Trump said, "I don't know."
Nevertheless, he reiterated his preference for lower interest rates, stating, "The U.S. economy is so strong that we should have the lowest interest rates in the world, regardless of their (the Fed's) formula."
President Trump has maintained the stance that interest rates should be lowered for economic growth, and in January of this year, he nominated Wash as Fed Chair, an individual he believed would reflect his views well.
When former Fed Chair Jerome Powell did not lower interest rates quickly, Trump once vehemently 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 respects the independence of Fed Chair Kevin Wash 100%," and "Whatever decision Wash and the Fed make, we will support it 100%."
However, he also warned, "If a rate hike comes this time, Trump... well, as everyone knows, he won't be too pleased."
He added, "If you want an independent Fed, one of the things the Fed should do is not interfere with elections," pointing out that a rate hike would be a major negative for President Trump in the midterm elections.
Nevertheless, it seems likely that the Fed will raise interest rates this time.
Former Fed Vice Chairman Roger Ferguson predicted in an interview with CNBC, "Looking at the indicators, the probability of the Fed taking action this week is much higher than the probability of it not doing so."
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 reaction if it doesn't actually implement a rate hike, given that the market has recently almost taken a rate hike for granted."
He added, "Chairman Wash's Jackson Hole speech created an expectation in the market that there would be a rate hike if inflation data wasn't perfect, and the recent CPI results, while perhaps not alarming, were certainly not 'perfect'."
There is also a possibility that President Trump will not strongly criticize Chairman Wash even if the Fed implements an interest rate hike.
On August 31, President Trump met with reporters in the Oval Office and stated that he thought current interest rates were "too high," but also indicated that he "would not unconditionally oppose" Chairman Wash raising interest 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, "Chairman Wash could be obstructed 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 an interest rate hike, Chairman 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 subject of discussion for the Fed." He added, "Chairman Wash is likely to use the majority opinion as justification to lead the situation from behind and cast a vote in favor of an interest rate hike."
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