Trump’s Fed nightmare: Rates won’t be slashed. They could surge now
If Donald Trump expects Kevin Warsh, his hand-picked chair of the US Federal Reserve Board, to deliver the interest rate cuts that he has continuously clamoured for, he is about to be disappointed, again.
It now appears inevitable that the Fed will deliver its second rate rise in this cycle – the first was in September – after the US inflation rate came in above expectations for the third successive month.
The only question – and just raising it will upset Trump – is whether the US central bank hikes its policy rate by 25 basis points or 50 basis points when it meets again next month.
The US Bureau of Labor Statistics said on Tuesday that consumer prices rose 0.4 per cent in October. While calculations are muddied by the fact that a government shutdown meant there was no data collected in October last year, most calculations put the annual inflation rate at 4 per cent.
Even if energy and food costs are excluded – which would remove the direct effects of the war in the Middle East on oil and fuel costs – “core” inflation in October was 0.3 per cent and the annual core inflation rate 2.8 per cent – well above the Fed’s target of 2 per cent.
Moreover, inflation is spreading across the US economy, thanks to Trump’s tariffs and the indirect effects of the higher oil and refined product prices on transport costs that are now feeding into goods and services prices.
The only question – and just raising it will upset Trump – is whether the US central bank hikes its policy rate by 25 basis points or 50 basis points when it meets again next month.
Fed officials are already preparing the ground for more than one rate hike.
Fed governor Christopher Waller (a Trump appointee) told an audience in London on Tuesday that, should the inflation rate for the month come in above 0.3 per cent, a half-percentage point (50 basis point) rate rise might be needed. A conventional 25 basis point rise, he argued, would do little to win confidence that the Fed was serious about tackling inflation.
Also on Tuesday, Dallas Fed president Lorie Logan said it was clear that the Fed needed to make “at least” two more 25 basis point rises and may need to move quicker than the bank had moved thus far.
Kansas City’s Fed president Jeffrey Schmid said he believed the central bank’s current stance was “fairly accommodative” while another Fed governor, Michelle Bowman, indicated that she, too, would support another rate rise.
Markets immediately priced in a 100 per cent probability of a 25 basis point rise in December as bond yields rose and the sharemarket fell.
The yield on two-year Treasury securities jumped 19 basis points – its biggest one-day rise since Trump’s “Liberation Day” tariffs were announced in April last year. The 10-year bond yield was also up, by 15 basis points to 5.01 per cent.
The inflation rate rose even though oil prices were mostly flat throughout the month. It would appear to be the delayed impacts of higher gasoline and, in particular diesel prices, that are now flowing through the economy and bleeding into consumer prices.
The oil price has fallen back this month to trade at around $US92 a barrel and gasoline prices are sliding, albeit that they are, at $US3.98 a gallon, still about 30 per cent higher than they were a year ago. Diesel prices are still 65 per cent higher than a year ago.
The oil price has been falling because oil flows from the Middle East have been restored to close to pre-war levels (albeit with far higher transport and insurance costs) and because Trump keeps saying that a negotiated end to the war is within reach, although he has said similar things throughout this year, but the conflict has yet to be resolved.
With the US midterm elections out of the way, the administration may, however, find it easier to accede to some of Iran’s demands.
Even if the oil price continues to retreat, however, refined product prices - of which diesel is the key product - are unlikely to subside as quickly, as the wars in the Middle East and Ukraine have significantly damaged refinery capacity.
The result of the midterms will help the Fed if it starts more aggressively raising US interest rates. That might infuriate the president, but there is little he can do about it.
If the wars were to end soon, it would still take well into next year for volumes to recover. In the meantime, the higher cost of transporting goods and food will continue to push up goods and grocery prices.
Tariffs remain another contributor to the inflation rate with their stop-start history, thanks to the courts consistently ruling them illegal and the Trump administration’s continuing efforts to reimpose them using new legislative headings. Toy prices, for instance, were 9 per cent higher than a year ago. Auto parts and repairs prices were up 0.6 per cent in October.
Then there’s the impact of the boom in artificial intelligence, which is pushing up the prices of semiconductors and impacting the prices of computers, smartphones and other devices as well as electricity prices.
The inflation data underscores why US voters gave the Republicans such a thrashing at the midterm elections. For ordinary US households, the cost-of-living pressures are real and intensifying.
The result of the midterms – a Democrat majority in both chambers of Congress – will help the Fed if it, as expected, starts more aggressively raising US interest rates. That might infuriate a president who wanted Warsh to deliver greatly lower rates, but there is little he can do about it.
Trump has tried, unsuccessfully, to remove former Fed chair Jerome Powell from the board, threatening to prosecute him for cost overruns in the renovations of the Fed’s Washington headquarters. He’s still trying to unseat another governor, Lisa Cook, with flimsy accusations of mortgage fraud.
Even if he were able to sack Cook (there is a handpicked administration panel “investigating” her), or Powell decided to retire before his term ends in January 2028, the Democrats are most unlikely to approve a new Trump nomination to the board. And other Fed governors are now less likely to feel intimidated by potential administration responses to votes in favour of rate rises.
It’s not been a good week for Trump and his Treasury Secretary Scott Bessent. On Monday, the Congressional Budget Office released its summary of the outcomes from the 2026 fiscal year which, in the US, ends on September 30.
The Trump administration presided over a deficit of $US2 trillion ($2.9 trillion), or 6.2 per cent of GDP, a significant increase from the $US1.8 trillion (5.8 per cent of GDP) deficit in fiscal 2025.
The administration is spending more (outlays were up 6 per cent) while, thanks to the One Big Beautiful Bill Act’s tax cuts for companies and the wealthy, generating only 3 per cent revenue growth. Corporate tax revenue fell 16 per cent. Customs revenue fell 11 per cent because the administration had to refund $US126 billion after the US Supreme Court deemed Trump’s original global tariffs illegal.
America’s finances aren’t improving. In October, the CBO estimates, there was a deficit of $US409 billion, 30 per cent more than the same month last year, with revenues shrinking and spending growing.
With government debt of more than $US40 trillion and the net interest cost of that debt rising 11 per cent in the year to September, to $US1.14 trillion, a rising rate environment would only increase the threat to America’s financial stability and its ability to sustain even its modest, by comparison with other developed economies, social security net.
Bessent, who promised to lower the deficit-to-GDP ratio to 3 per cent, now says economic growth will fix America’s public finances.
It won’t, and Trump’s second term will, like his first term, leave a legacy of unfulfilled promises and unsustainable debt and deficits, with ordinary Americans much poorer for the experience.
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