The Fed's "Sandwich Moment": Why Is Kevin Warsh in a Dilemma?
Hello, everyone, and welcome to your financial news analysis. Today, we're discussing the most nerve-wracking battle on Wall Street: Will the Federal Reserve raise interest rates or not?
At 2 a.m. Beijing time on September 17th, Federal Reserve Chairman Kevin Warsh will reveal the answer. This is not just about a number; it's a complex game involving face, substance, and politics.
To make it easier for you to understand, I've broken down this complex financial news into 5 key points and explained them in plain language.
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1. The Market Has Already “Bet” on Rate Hikes, and Warsh Can't Back Out Easily
Core Logic: If everyone thinks rates will rise, and you don't, they won't trust you.
It's like at a dinner party where everyone is looking at you, waiting for you to say, “I'll pay.” If you suddenly say, “I won't; you figure it out,” people will think you're unreliable and won't invite you to future gatherings.
- The Data Is Hot: Recent U.S. employment numbers (August non-farm payroll) were astonishing, with an increase of 162,000 jobs, far exceeding the expected 55,000. Inflation (CPI) has also risen higher than expected. These signals are saying, “The economy is hot, and there's pressure on inflation; we need to slow down (raise rates!).”
- The Market Is Resolute: Prediction platforms like Polymarket and CME show that the market believes the probability of a 25-basis-point rate hike by the Fed is as high as 89%-92.5%, even close to 100%.
- Warsh's Credibility Crisis: Since taking office, Warsh has emphasized that the Fed should be independent and not always follow the market. But if the market has already priced in a rate hike, and he suddenly says, “No, we won’t,” it would suggest inconsistency or political compromise. For a central bank chairman, credibility is more important than a single interest rate decision. Once credibility is damaged, it becomes much harder to control the market in the future.
In One Sentence: The market has voted for a rate hike, and going against it would be too costly for Warsh.
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2. Trump's Obsession with Rate Cuts and the Political Pressure of Midterm Elections
Core Logic: The president wants low interest rates to please voters, but the central bank chairman can't just follow political cues.
Trump has always argued that U.S. borrowing costs should be the lowest in the world. He has repeatedly pressured the Fed to cut rates, even threatening to escalate the trade war if the Fed doesn't act.
- Why Trump Is Urgent for Rate Cuts?
- Midterm Elections Approach: What voters are most concerned about now are rising prices and expensive mortgages. If rates fall, although the effects will take time, it gives Trump an excuse: “See, I'm trying to improve the economy, and living costs will decrease.”
- Reducing Government Debt: U.S. government debt interest payments are huge; lower rates mean less pressure on the government to repay debt.
- Warsh's Dilemma:
- When Trump appointed Warsh, he promised complete independence.
- But if Warsh raises rates, Trump might criticize him on Twitter or social media; if he doesn’t, the market will criticize him for being weak.
- The Dilemma: Raising rates angers the president; not raising rates angers the market.
In One Sentence: Trump wants low interest rates to win votes, but Warsh has the power to control inflation and can't ignore the overheating economy.
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3. The “Truth” About Inflation: Is It Widespread or Just a Fluctuation?
Core Logic: The data looks scary, but upon closer inspection, it might not be as bad.
This is one of Warsh's key arguments. Although CPI (Consumer Price Index) numbers are high, experts point out that the increase is mainly due to a few “volatile” items (such as energy and certain goods), not a general rise in prices.
- Warsh's Perspective: Warsh focuses on the breadth of inflation (how many types of goods are increasing in price). Data shows that the breadth of inflation is actually narrowing, indicating that inflation might be cooling down, not out of control.
- Reasons Against Raising Rates: If inflation is just a temporary fluctuation and the overall trend is improving, keeping rates unchanged makes economic sense.
- The Problem: The market doesn't look at these details; it only sees the overall numbers. High numbers cause panic. If Warsh chooses not to raise rates, he needs to convince the market: “Don’t panic; I’m looking at deeper data; inflation isn’t that bad.” But this is difficult when the market is already very anxious.
In One Sentence: Warsh believes inflation isn’t that bad and could wait; but the market focuses on surface data and thinks a rate hike is necessary. This is a conflict between expert analysis and market sentiment.
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4. The Economic Reality: High Rates Are Hurting the Economy
Core Logic: High rates are putting significant pressure on the real economy.
- Exorbitant Mortgage Rates: 30-year mortgage rates have exceeded 6%, which is a huge burden for homebuyers and a sales challenge for real estate developers.
- High Business Costs: Borrowing for expansion has become more expensive, suppressing business investment.
- Declining Consumer Confidence: The University of Michigan survey shows a sharp drop in consumer confidence in September, indicating that people think it will be harder to make money and living costs are rising.
- Expert Opinion (Professor Hu Jie): If rates could be cut by 25 basis points now, short-term rates would fall, and long-term rates would follow, easing the pressure on the Treasury and giving consumers some relief.
The Conflict: The economy is calling for relaxation (lower rates or no rate hikes), but inflation data is calling for tightening (higher rates). Warsh is caught in the middle, trying to prevent inflation while avoiding a hard economic landing.
In One Sentence: The economy is in pain and needs relief (lower rates); but inflation is still high, and more stringent measures (higher rates) are needed. Warsh doesn’t know which to prioritize.
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5. Warsh’s Personal Relationships and the Future Path: Is a Rate Hike Just the Beginning?
Core Logic: Things might not be as bad as it seems; Warsh might have ways to appease Trump, and there could be room for future rate cuts.
Although the situation seems stuck, there are still options.
- Personal Relationships Could Be a Buffer: There are reports that Warsh and Trump have a good relationship and often communicate informally. Economists from Energy Aspects suggest that Warsh could “flatter” the president on the phone and listen to his opinions, thus reducing political pressure. In other words, a rate hike doesn’t necessarily mean a political break.
- Future Plans: Bloomberg Economics predicts that even if rates are raised by 25 basis points in September, the Fed will raise them again in 2026, but cut them in 2027 and 2028. This means the current hike is a “short-term pain” to prevent future, more severe problems (high inflation).
- This Also Gives Trump Some Face: “See, we’re only tightening temporarily; we’ll still cut rates later.”
In One Sentence: Warsh might choose to raise rates to maintain market credibility, use personal relationships to soothe Trump, and hint at future rate cuts to ease current political and economic pressures.
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📝 Journalist's Summary: What Will Warsh Decide?
Overall, the probability of a 25-basis-point rate hike is very high (close to 100%).
- Why Not Choose “No Rate Hike?” Because the market has already priced it in, and the cost of going back on that decision would be too high in terms of credibility.
- Why Isn’t Warsh Afraid of Trump? Because he needs to maintain his “independent” image and has informal channels of communication with Trump. Plus, there are expectations of future rate cuts, so Trump might not really turn against him.
Implications for You:
1. USD Assets: If rates rise, the USD may strengthen in the short term, benefiting those holding USD assets.
2. Mortgages/Lending: Rates may remain high in the short term, so those with large loan plans should be prepared for higher costs.
3. Investment Strategy: Don’t panic too much. The Fed’s rate hike is preventive, not panic-driven. There’s still room for future rate cuts, and the economy won’t collapse immediately.
In Conclusion: On the Fed’s board, credibility and data are more important than politics, but Warsh is trying to balance both.