Trump may not see another rate cut as president

As The Rolling Stones famously said, you can't always get what you want. Apparently, not even if you're the most powerful person on Earth.

The Federal Reserve on Wednesday raised its policy rate target range by a quarter of a percentage point to 3.75%-4.00%, the first rise in more than three years. U.S. President Donald Trump responded in a combative social media post, demanding once again that rates be cut: "LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!"

Unfortunately for Trump, his calls for a fed funds rate of 1% or lower will almost certainly not be met during the remainder of his presidency, barring an unforeseen catastrophe that forces the Fed to slash rates to zero, as it did during the global financial crisis and the COVID-19 pandemic.


Also Read: 'In our lane'- Fed's Warsh defies Trump but still fighting for credibility

To add insult to injury, the rates futures market is now pricing in a roughly 50% chance that the Fed could raise rates again at its next meeting in October, only days before the U.S. midterm elections.

Trump insisted on Wednesday that he has confidence in Fed Chair Kevin Warsh, but it's safe to say he would not welcome another hike just before voters go to the polls. The president's approval ratings are already near the lowest in his presidency, and polls suggest his Republican Party could lose control of the House of Representatives and possibly the Senate, too. Another notch higher in borrowing costs might help ease voters' concerns over inflation, but Trump is unlikely to see it that way.

Many Fed-watchers had previously dismissed the possibility of an October hike, arguing that the Fed - and Warsh in particular - would want to avoid any appearance of acting with a political motive.

But given Wednesday's unanimous rate hike, the upwardly revised rate projections from Fed policymakers and Warsh's surprisingly hawkish press conference, a move in October is now very much on the table.

HIGHER FOR LONGER

Will Trump see another rate cut before he leaves the White House?

Also Read: ‘Fed’ up with inflation? US rate hike leaves RBI with an October-or-December dilemma, economists say

In their revised economic projections, Fed officials raised the median fed funds mid-range point outlook for the end of 2027 and 2028 by 50 bps to 4.1% and 3.9%, respectively.

These broad projections still imply a slight easing of policy over the course of 2028, Trump's last full year in the White House before the January 2029 handover to his successor. But it's a close call.

But markets appear much more convinced that U.S. rates will need to be kept higher for longer. Traders are now pricing in a "terminal rate" - the peak of the hiking cycle - of around 4.60%. That's likely down to a combination of deficit and debt worries, lingering doubts over Fed independence and concerns about the factors keeping inflation hot, namely geopolitical conflict, energy price pressures, and AI-related spending.

Whatever the cause, the message is clear: Markets expect that rates aren't coming down over the next two years. And that's not what Trump wants to hear.

UPSIDE RISKS?

He may also have been slightly irked to hear Warsh say "geopolitics" is a key reason why inflation is sticky and bond yields are so elevated. But it's hard to escape the conclusion that, although there are several forces at play here, a major one is the impact of reduced energy supply stemming from the Iran war. At the very least, the onset of hostilities was a clear turning point in the Fed's expected rate path.

Consider this. On February 27, the day before the U.S. and Israel attacked Iran, SOFR rate futures were pricing in a fed funds rate of 3.13% at the end of 2028. At the close of trade on Wednesday, the same contract implied a policy rate of around 4.60%.

Or put another way: Before the war traders were pricing in two rate cuts over the rest of Trump's presidency, and now they are pricing in three hikes - on top of the one delivered on Wednesday.

That's an extraordinary, extremely hawkish pivot. Traders are pricing in a significantly higher terminal rate than they were before the war.

"We see upside risk to the length and size of the hiking cycle," economists at BNP Paribas wrote on Wednesday. "With policy starting at a stimulative stance, a strong cyclical impulse, and persistent inflation, we think significant rate increases, perhaps more than the three we expect, may be necessary to stabilize the unemployment rate from below and prevent overheating next year."

In his Truth Social post on Wednesday, Trump said interest rates should be slashed because the U.S. is "the Best Credit in the World - BY FAR."

That may be, but the overwhelming majority of observers and experts - including Warsh, it appears - would disagree. So much so that there's a growing likelihood that the Fed's 25 basis-point rate cut last December, under the chairmanship of "clueless" Jerome Powell, will be the last one Trump sees as president.

(The opinions expressed here are those of the author, a columnist for Reuters)