Probability of rate hike by the Fed soars! Trump loosens his grip: Powell can "decide rates as he sees fit"

This week, the tone of President Trump towards the "Fed rate cut" has softened. After more than a year of unprecedented pressure on the Fed, he hinted that he would give some leeway to Kevin Wash, the incoming Fed chairman. On Tuesday, when asked in an interview whether Wash would still cut interest rates despite the widespread belief in the financial markets that the Fed is more likely to raise rates, Trump replied, "I will let him do it his way." Trump said, "He is a very talented person, he will be fine, he will do a good job." This is not the first time Trump has softened his pressure on the Fed to cut interest rates. Earlier this week, in an interview, he said that the escalating inflation related to the conflict with Iran has made the prospect of a rate cut in the U.S. complicated. Only when the Middle East conflict subsides can inflation data be fully evaluated. "You can't really see these data clearly until the war is over," Trump said at the time. He was referring to the impact of rising oil prices related to the conflict with Iran. Since the start of his second term, Trump has been fiercely criticizing outgoing Fed Chairman Powell for not cutting interest rates as quickly as he had hoped. A White House official said on Monday that Trump will hold an inauguration ceremony for Wash on Friday, making him the chairman of the Federal Reserve Board of Governors. At that time, the 56-year-old lawyer and financier will officially take over from Powell as head of the Fed. Economists have always said that Wash will face a difficult start when he takes office. The market is highly concerned about whether Wash can formulate a policy different from the president's before the critical midterm elections in November. What does Trump's attitude change signal? Analysts believe that Trump's latest remarks seem to be acknowledging that Wash only has one vote on the Federal Open Market Committee's FOMC. Economic analyst Derek Tang of Monetary Policy Analytics analyzed, "Trump seems to understand how the FOMC works and he may not be able to get his way, at least not at the beginning." "It sounds like the White House is giving itself a way out in advance because we definitely won't see a rate cut in June. This also allows Wash some breathing room to gain a foothold in his early months in office," he said. However, Tang added that as the November midterm elections approach, the White House's patience with Wash may run out. He pointed out that if the Republicans want to replicate their victory in 2024, the public sentiment on the economy must improve before September. Currently, expectations for a rate cut by the Fed this year have been almost completely extinguished, while expectations for a rate hike in financial markets are increasing sharply. Traders in the derivatives market believe that the likelihood of a rate hike by the Fed before December has reached 60%. Clearly, Trump's leniency towards Wash contrasts sharply with his fierce criticism of Powell. This change in attitude highlights the obvious shift in the global financial market environment. With the ongoing standoff between the US and Iran and escalating inflation concerns, global bond markets have recently been hit by a severe sell-off, with bond yields skyrocketing not only impacting risk assets such as US stocks but also increasing the US fiscal burden. Several analysts pointed out that the Fed can only stabilize the rising bond yields by taking a hawkish stance; otherwise, the central bank will be seen as falling behind the market situation, leading to a further increase in bond yields as investors will demand higher inflation risk premiums. Wall Street veteran and founder of investment advisory firm Yardeni Research, Ed Yardeni, recently warned that incoming Fed Chairman Wash was originally sent to the Federal Reserve to lower interest rates, but he may instead need to push for rate hikes to build credibility. And the point at which he will raise rates is "imminent": most likely in July. This article is reprinted from "Finance and Economics", written by Bian Chun; GMTEight editing: Feng Qiuyi.