Trump's Warning Falls on Deaf Ears as Warsh Faces Inflation Report Dilemma

Kevin Warsh's decision on interest rates is pending the upcoming inflation report from the BLS, which could either push him to raise rates or leave them steady. Donald Trump had previously warned Warsh not to increase rates at this month's FOMC meeting, but it seems unlikely that he will meet that demand.

According to market commentators, a strong jobs report and upward revisions in the labor market have shifted the balance of risks around the dual mandate, making upside risks to inflation more significant than downside labor market risks. This suggests that Warsh would rather not hike rates, despite his tough talk at Jackson Hole.

Chris Waller is also inclined to hold rates steady if the August inflation tally provides some air cover. Consensus is expecting a 0.2% MoM core CPI readout on Friday, which would slow the YoY pace to 2.4%, the lowest since March 2021. A hot read on core CPI would put Warsh in a tough spot and pressure him to follow through on his commitment to price stability.

BMO's Ian Lyngen believes that the bar for inflation data to favor a rate increase is relatively low, but even he thinks a hold is more likely than a hike. Changes to the PCE inflation methodology due September 30 may also impact the Fed's decision, potentially providing an incentive to stay on hold.