"New Federal Reserve News Agency": Waller's Rate Hike Leaves No Retreat, Trump's "Trust" Faces Test

Waller has maintained a balance between the White House and the Federal Reserve with a strategy of "saying less and avoiding provocation"; after this meeting, silence will no longer be a shield.

Written by: Long Yue, Wall Street Insights

Last year, Trump pressured the Federal Reserve to cut interest rates, but now the chairman he personally selected is being pushed to the brink of a rate hike by the market.

On September 14, Nick Timiraos from the "New Federal Reserve News Agency" published an article in the Wall Street Journal discussing a critical decision facing Federal Reserve Chairman Kevin Waller: whether to announce a rate hike at this week's meeting amid persistent inflation and rising energy prices.

Timiraos believes that Waller's series of statements over the past few months have left him with almost no room to "stay put." The August CPI data exceeded expectations, effectively closing the last exit. Meanwhile, the White House's stance is ambiguous—verbally stating "100% respect for independence" while hinting that it would not be "too pleased" with a rate hike.

With only seven weeks left until the U.S. midterm elections, if Waller chooses to raise rates, it will directly test Trump's long-standing "trust" in him. But if he does not raise rates, how will Waller's credibility fare? Previously, Waller maintained a balance between the White House and the Federal Reserve with a strategy of "saying less and avoiding provocation," but after this meeting, silence will no longer be a shield.

How Did Waller Corner Himself?

Since taking over as Federal Reserve Chairman in May, Waller sent a strong anti-inflation signal during his first press conference in June, leading the market to expect more aggressive action. However, at the subsequent meeting, he chose to keep interest rates unchanged without providing a convincing explanation—why, after such strong statements, did policy remain stagnant?

As a result, long-term interest rates rose during his speech. Timiraos wrote that this is a signal of "investors' uncertainty about whether his tough rhetoric will translate into actual policy."

In August, Waller attempted to correct this impression during a keynote speech. He stated, "There is almost no evidence that borrowing conditions are restraining the economy," and that the better inflation data over the summer did not convince him that the underlying trend had improved. This statement was essentially paving the way for a rate hike.

But the real "closing of the last door" came with the CPI data in September. Timiraos wrote, "The August consumer price index rose more than expected, breaking the improvement momentum of the previous two months," which had originally been a preliminary validation of the Federal Reserve's own forecasts. After the data was released, the market's betting probability for a rate hike this week quickly rose to about 90%.

More critically, the data fell within the Federal Reserve's "quiet period" before the meeting, and no officials could come out to "cool things down." With the interest rate meeting on September 17 approaching, Waller's options are narrowing.

What Lies Behind the White House's "100% Support"?

Just before this week's meeting, Kevin Hassett, director of the White House National Economic Council, publicly stated on television that inflation is improving and that the Federal Reserve does not need to raise rates. He emphasized that Trump "100% respects Kevin Waller's independence" and will "100% support" any decision made by the Federal Reserve.

This statement sounds dignified, but Hassett immediately added that Trump "would not be too pleased" with a rate hike.

He also suggested that if the Federal Reserve adjusts rates close to the elections, it would "damage its reputation for staying away from politics." Timiraos interpreted this logic in reverse: if the White House publicly calls for a rate cut, and the Federal Reserve chooses to stay put while the market widely expects a rate hike, it would similarly raise doubts about whether Waller is catering to the president who appointed him.

In other words, no matter how Waller chooses, there will be questions about his motives. This is the core dilemma regarding the independence of the Federal Reserve.

Trump and the Federal Reserve: From "War" to "Ceasefire"

Last year, Trump launched "the most sustained public pressure on the Federal Reserve in decades." He repeatedly attacked former Chairman Powell and even threatened to file a fraud lawsuit against him. He placed his economic advisor Stephen Miran on the Federal Reserve Board, who voted in favor of easing policies at all six meetings he attended. Trump also attempted to remove Federal Reserve Governor Lisa Cook—this was the first attempt by a president to fire a Federal Reserve governor, which ultimately failed due to Supreme Court intervention, but the case remains unresolved.

Waller's arrival temporarily ended this "war." Trump repeatedly stated, "I trust Waller to do the right thing," allowing Waller to avoid the kind of public attacks faced by Powell.

However, Timiraos points out that this "ceasefire" is conditional. Raising rates seven weeks before the election will directly test how long Trump's "trust" can last.

Notably, Waller himself publicly criticized the Federal Reserve for being too slow to cut rates last year. When asked whether this position was influenced by the president who might nominate him, he responded on CNBC, "Birds change feathers at the right time, adapting to the situation. This has nothing to do with this president."

Waller's Position: Independent or Isolated?

In the face of various speculations, Waller has consistently emphasized independence in his public statements.

"They chose an independent person to do an independent job, and that is exactly what I plan to do," Waller stated during a congressional hearing this summer.

Timiraos also revealed a detail: those who have communicated with Waller indicated that he believes the Federal Reserve during Powell's era worsened the situation by making some "unnecessary confrontational remarks"—such as publicly describing how tariffs raise prices or openly defending the independence of the Federal Reserve. Waller's strategy is to "say less and avoid provocation."

This low-key style has, to some extent, maintained peace with the White House. But if a rate hike is indeed announced this week, silence will no longer be a shield.

What Do Economists Think?

The economic community is not united on this rate hike.

Former Congressional Budget Office Director and Republican economist Douglas Holtz-Eakin has a straightforward judgment. He stated that before July, he believed Waller did not need to risk a falling out with the White House before the midterm elections. However, since July, Waller's statements combined with energy shocks and the economic situation shaped by AI prosperity have left him "with nowhere to stand."

"His hand has been forced to play a card," Holtz-Eakin said, "Kevin Waller is an excellent politician, and he needs to find a way to handle this matter."

He also predicted possible future directions: Trump and Waller could tacitly allow Trump to publicly criticize Waller while Waller silently endures; or Trump could simply change the subject and act as if nothing happened. "Trump will change the subject rather than confront directly because he cannot admit he made a mistake," Holtz-Eakin said.

However, Michael Strain, a conservative economist at the American Enterprise Institute (AEI), holds a different view. He believes that rates should have been raised in July, but since nothing was done then, now, just weeks before the election, is not the right time to act.

"The unfortunate reality for the Federal Reserve is that it cannot ignore the fact that President Trump has a deep-seated hostility towards this important institution," Strain said. He believes that investors will digest the speed of "staying put" much faster than the Federal Reserve will recover from its conflict with Trump.

Future Direction: After the Ceasefire

How resilient is the principle of the Federal Reserve's independence in the face of political pressure?

The article points out that adjusting rates before and after elections is not without precedent—the Federal Reserve has made similar moves before political conventions in 1988, 1994, 2004, 2018, and during Biden's term in 2022. Historically, the intersection of monetary policy and election cycles is not uncommon.

However, the current uniqueness lies in the fact that Trump's hostility towards the Federal Reserve is well-documented, and every move Waller makes is being magnified and interpreted.

Holtz-Eakin's judgment may be the most pragmatic: regardless of the outcome, Waller needs to demonstrate that he is making decisions based on economic data rather than political pressure.