Posted on by Colin Twiggs

Warsh Hawkish But Won’t Hike

Key Points

  • Fed Chair Kevin Warsh’s keynote speech at Jackson Hole had a distinct hawkish tone.
  • Financial markets responded with a sharp jump in the 2-year Treasury yield to 4.36%.
  • However, Warsh’s hands are tied by political considerations, and no rate hike is likely.

We are convinced that the FOMC will not hike rates at its September meeting despite the Fed Chair’s hawkish speech at Jackson Hole on Friday, August 28.

The new Fed Chair set a hawkish tone in his keynote address to the Fed’s Jackson Hole economic symposium in Wyoming.

“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, ‌we have work to do. That’s our job … our mandate … and our charge to keep,” Warsh said.

….”The Fed’s predominant focus right now should be on prices.”

The 2-year Treasury yield jumped by 9 basis points within 20 minutes of Warsh’s speech and ended Friday up 13 basis points at 4.36%, more than 60 basis points above the Fed’s current target range of 3.5-3.75%.

2-Year Treasury Yield (CNBC)

However, Warsh is unlikely to support a rate hike before the November midterms because of the political implications.

Warsh has strong Republican credentials, having served in President George W. Bush’s White House and as the youngest board member in the Federal Reserve’s history. He has also spoken about the importance of free trade, the Fed’s political independence, and a strong Dollar — views that could lead to conflict with the current President. However, he has close links with Treasury Secretary Scott Bessent, having worked as partners at Stan Druckenmiller’s Duquesne Capital. He also has strong MAGA ties through his father-in-law, Ronald Lauder, son of Estee Lauder, who is a decades-long friend and ally of Donald Trump.

One of Warsh’s two appointees at the Fed is Paul Winfree, who authored the chapter on the Federal Reserve in the Project 2025 blueprint. The other is Daniel Heil, a fellow at Stanford’s conservative Hoover Institution, where Warsh served before joining the Fed.

Warsh enjoys the trust of President Trump, who regularly consults him on economic matters. A far stretch from the strained relationship with his predecessor, Jerome Powell, whom Trump did his best to undermine, including having him investigated by the Justice Department.

President Trump has a long history of turning on his political allies if they do not do his bidding. He repeatedly criticized his earlier appointee, Fed Chair Powell, for not lowering interest rates, going so far as to suggest that Powell was a bigger threat to the United States than Chinese President Xi Jinping. Powell insisted that the Fed made decisions based on data without regard to politics, but that did not seem to placate the President. The Fed then cut rates in September 2024, two months before the last presidential election, which seems to have convinced Trump that Powell was politically motivated.

We believe that Kevin Warsh is politically astute, having won nomination as Fed Chair despite his old-school Republican values. As a recent Trump appointee, presiding over a Fed that hikes rates two months before the upcoming midterm elections would likely be taken by the President as a betrayal of his trust. It would invite similar persecution to what his predecessor faced. That would be politically stupid.

Conclusion

The new Fed Chair is unlikely to convince President Trump of the need to hike rates ahead of the November midterm, and is unlikely to support such a move without his assent.

The President will not want to upset his predominantly blue-collar MAGA base, especially after the Iran debacle, when he needs a strong turnout in the November midterms. Your typical MAGA voter is not that sophisticated and is unlikely to be persuaded by arguments that higher interest rates will reduce inflation in 12 months’ time, but will instead be incensed by an increase in interest payments on their car loan and credit card.

This is kitchen table economics. That is what is driving Fed monetary policy.

Acknowledgments

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