Trump says he will let Warsh decide rates as inflation hits 3.8%

President Donald Trump said he will let Federal Reserve Chair Kevin Warsh decide interest rates, retreating from the public pressure campaign that defined his relationship with predecessor Jerome Powell.

"I will let Warsh decide interest rates. If I were to cut rates, I wouldn't mind," Trump said, according to a statement reported by Chinese financial media. The comments mark a sharp reversal from Trump's approach toward Powell, whom he repeatedly criticized for not lowering borrowing costs.

The Fed's benchmark rate has been held at 5.25% to 5.5% since July 2023, after 11 consecutive increases brought it from near zero to the highest level in more than two decades. The 2-year Treasury yield fell 4 basis points to 4.12% after Trump's comments, while the S&P 500 added 0.8%, reflecting investor relief that political pressure on the central bank may ease. Inflation as measured by the Consumer Price Index rose 3.8% in April from a year earlier, well above the Fed's 2% target and the highest reading in nearly three years, driven by rising oil prices tied to the conflict with Iran.

For markets, Trump's statement reduces the risk that political pressure could force the Fed into premature rate cuts that reignite inflation. OIS markets price a 62% probability of a rate cut by September, according to CME FedWatch data, but those expectations could shift depending on whether Warsh prioritizes restoring the Fed's credibility over accommodating the White House.

Warsh's Inflation Philosophy Points to a Longer Wait

During his Senate confirmation hearing in April, Warsh offered a definition of price stability that may keep rates higher for longer than markets expect. "I believe that price stability should be a change in prices such that no one's talking about it," Warsh said. The 18-word statement suggests the new Fed chair views inflation through the lens of public perception, not just a numerical target.

If Warsh holds to that standard, the current 3.8% inflation rate — which consumers feel acutely at the gas pump and grocery store — remains far from defeated. The last time the Fed faced a similar gap between its target and public perception was in the early 1980s, when then-Chair Paul Volcker pushed rates above 20% to break entrenched inflation.

Labor Market Strength Complicates the Calculus

The U.S. added 172,000 jobs in May, beating expectations, while the unemployment rate held at 4.3%, the Bureau of Labor Statistics reported. Average hourly earnings rose 12 cents, or 0.3%, to $37.53, bringing the annual increase to 3.4%.

A resilient labor market gives the Fed cover to hold rates steady even as Trump pushes for cuts. "Almost every industry is hiring again except tech and finance," Heather Long, chief economist at Navy Federal, said after the May report. "Unfortunately, inflation is a lot worse."

The combination of above-target inflation and solid job growth mirrors the conditions that led the Fed to pause its easing cycle in 2024. If the pattern holds, Warsh may find himself in the same position as Powell — facing White House pressure while the data argues for restraint.

Forward Outlook

The Fed's next policy meeting is scheduled for June 16-17. Warsh is expected to eliminate the central bank's forward guidance — including the quarterly "dot plot" of rate projections — according to reporting by the Financial Times, a move that would reduce transparency around the rate path and potentially increase market volatility. Dallas Fed's Logan and Governor Christopher Waller have both said a rate increase, not a cut, could be necessary later this year if inflation does not ease.

This article is for informational purposes only and does not constitute investment advice.