The Fed raises interest rates and its president heads towards a clash with Trump
It is the first time that the Federal Reserve increases the price of money since 2023, when Joe Biden was still governing
WashingtonThe honeymoon between the new Fed chair, Kevin Warsh, and the US president, Donald Trump, is over. The Federal Reserve announced this Wednesday that it is raising interest rates to between 3.75% and 4%, which represents an increase of more than 0.25 points compared to the previous 3.5%. The decision was unanimous: 12 votes in favor, and zero against. This is the first time the US central bank has raised rates again since 2023, when Joe Biden was still president. A parallel that, likely, will not please the current US leader either.
After nine months of relative calm, Warsh has felt the thorns of his new chair for the first time: Trump, who appointed him to the position expecting obedience, had once again pressured the Fed to cut interest rates. But the current economic scenario, with inflation hovering around 3.4% (far from the 2% target) and a stable, though not particularly vigorous, labor market (the unemployment rate remains around 4%), pointed in another direction.
In the press conference following the decision, Warsh pointed out how, despite employment levels being "consistent" and in "good shape," inflation has remained "above target." "Our primary goal is to keep prices stable. Simply put, inflation is too high and has been for too long," stated the Fed chair. Warsh pointed to the quorum in the vote to raise rates as a "sign of our determination to achieve price stability."
However, a good part of this increase in inflation in recent months has also been spurred by the war in Iran and the blockade of the Strait of Hormuz. Warsh acknowledged that raising rates does not automatically solve the problem in the Middle East, "we cannot influence the price of any specific product," but "we can ensure that any change in relative prices does not spread or cause second and third-order effects on the economy." Ironically, the scenario that the Federal Reserve faces today under Trump's mandate is not so different from the one it had under Biden: now it is the war in Iran that forces rates to be raised, then it was the war in Ukraine.
Although he had not reached the same level of verbal aggression that he used with Jerome Powell when he was still leading the organization, during the last few weeks Trump had made his impatience known. "I would love to see lower interest rates," said the American president at an event at the White House on July 29th. Then, he praised Warsh - "he is fantastic," he said-, and blamed the Fed board, saying it was "politicized" and that "they want to keep rates high".
On September 4th, with the Fed meeting already on the horizon, Trump pressed the accelerator. "We should be paying the lowest interest rate in the world," said the leader, after the consumer price index report showed that inflation was not slowing down. The Republican complained that higher interest rates cost the country more money regarding its debt. "We should be at 1% or half a percentage point," he said. "We should not be at 4%".
At the last Fed meeting held in July, Warsh opted for prudence and froze rates after the ceasefire between Iran and the US was broken. Since then, the White House has not only continued to exchange fire with the ayatollahs, but the Houthis have also threatened to block the Bab el-Mandeb Strait, and Trump has decided to start a war of attrition with Canada, the second country from which the United States imports the most products.
On Tuesday, the price of United States crude oil reached 106 dollars per barrel, while gasoline prices remain 45% above the levels of February, when the war with Iran began. Diesel prices have reached the highest level in history, a fact that exerts pressure on farmers and truckers who depend on it.
The increase in interest rates also comes after the Treasury Department announced last August that the United States public debt has risen to 40 trillion dollars.
