The US Federal Reserve decides today if it clashes with Trump

BarcelonaThe president of the United States Federal Reserve (Fed), Kevin Warsh, faces the challenge this Wednesday of raising interest rates to combat inflation, which stood at 3.4% in August, far from the 2% target. Markets and investors take for granted a quarter-point increase, with a probability of more than 90%, according to the digital tool Fedwatch CME. But there is a problem: this is precisely the opposite of what the country's president, Donald Trump, who pushed for Warsh's appointment, wants. The head of the White House, in addition, threatened to cut off trade with all countries with which it has a trade deficit if the Fed does not lower the price of money, currently situated between 3.50% and 3.75%, after keeping it in July.

All this is happening while the 10-year Treasury bond, a benchmark for mortgages and loans in the US and even for stock valuations, flirts with the 5% level, as it did two decades ago due to investors' fear of persistent inflation and an increase in the cost of money that they see as very likely. Also, two-year securities, even more closely linked to expectations regarding monetary policy, are increasing their yield to around 4.6%, in the face of a possible interest rate hike.

Warsh, who opened the door to raising interest rates if inflation persisted, faces the challenge of demonstrating that he is independent regarding the pressures from the White House. His predecessor, Jerome Powell, was the subject of an intense campaign against him by Trump, who wanted him out for not lowering the cost of money even though economic variables did not advise it. There are two variables that would allow the Federal Reserve president, who has shown himself to be a defender of a Fed that sends few clarifying messages to the market about its plans, just as his predecessors did. One piece of data that could serve him is the evolution of employment, with the creation of 162,000 jobs in August, well above forecasts.

The other variable is core inflation, which includes neither unprocessed food nor energy and is, therefore, the most structural one. This went from 2.5% in July to 2.4% in August. It could be a small breather that would allow Warsh to postpone the interest rate hike until after the midterm elections, which are on November 3rd and in which Trump, who no longer has time to get fuel prices down—a very sensitive element for Americans—is staking his majority in Congress. For this reason, it is not ruled out that the rate hike could be postponed not to the next Fed meeting on October 29th, but to the one on December 9th, already after the elections.

Analysts, very attentive to all the movements that Warsh may carry out, are convinced that the issue is not only whether an interest rate hike is necessary or not, but whether the Fed can afford not to carry it out. With oil above 100 dollars (both with the Brent barrel, the reference quality in Europe, and with the West Texas one, that of the USA), the pressure to increase the price of money is growing. And the pressure from investors to obtain more yield on public debt is also greater. The European Central Bank (ECB) already took the step last week with a quarter-point hike, to 2.75%.

"In simple terms, higher oil prices lead to higher inflation expectations and vice versa," stated Steve Sosnick, chief strategist at Interactive Brokers, to the CNBC network. In his view, the relationship is usually not as tight, but the geopolitical factors currently driving crude oil and global inflation have caused both variables to move practically hand in hand. According to experts, holding rates could weaken the dollar and put further upward pressure on Treasury bonds, which are also subject to competition from large tech companies that are also seeking capital to invest in data centers.