Trump pushes Fed to cut rates, but Waller may go the opposite way: Next week’s meeting faces a “three-way choice”

As Trump continues to pressure the Federal Reserve to cut interest rates, the new Chair Walsh may face a difficult policy decision next week.

Bloomberg columnist Claudia Sahm's latest analysis suggests that the current key issue is no longer just about raising or cutting rates, but whether the Federal Reserve can maintain policy independence amid political pressure and inflation risks. She believes that, as the risk of inflation resurging and staying high for an extended period increases, rate hikes might become a viable option again.

As reported previously by Wallstreet Insights, on September 4, Trump once again called for the Federal Reserve to cut rates, stating that high interest rates put the US at an "unfair disadvantage" and demanding that the Fed and its "excellent new leadership" act "patriotically" this time. Meanwhile, US inflation remains clearly above the 2% target, and the market currently estimates about a 60% probability of a rate hike in the September 16 meeting.

Against this backdrop, analysis suggests that there are roughly three possible policy paths for the Federal Reserve next week, and the choice will not only determine the direction of rates, but may also further influence the market's assessment of Walsh's leadership and the Fed's policy independence.

Scenario 1: The Fed Raises Rates Alone Without Walsh’s Support

Given that multiple voting members have already expressed a preference for tightening policy, the possibility of a "hawkish alliance" emerging within the Federal Reserve cannot be ignored.

In the last decision to keep rates unchanged, Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan—the three voting members—cast dissenting votes, favoring a rate hike. Subsequently, Governors Lisa Cook, Michael Barr, and Christopher Waller also stated that they would remain open to potential tightening based on data changes.

According to Bloomberg, Bianco Research’s Jim Bianco noted that former Chairman Powell has remained silent since stepping down. Powell previously chose to stay on the Federal Reserve Board to safeguard the institution's independence, which means there remains a possibility he could join the hawkish camp and support a rate hike at a critical moment.

However, if the committee's final vote is at odds with the chair’s stance, an open rift between Walsh and the majority of committee members would be an extremely rare event in modern Federal Reserve history. This could heighten market doubts about policy direction and further intensify volatility in the interest rate and bond yield markets.

Scenario 2: Holding Steady, Hard to Escape “Political Interference” Allegations

Holding steady might seem prudent, but the costs are equally high.

If the Federal Reserve keeps rates unchanged at 3.5% to 3.75% before the November 3 midterm elections, it will likely be interpreted as being influenced by political pressure—with Trump’s recent public statements seen as the most direct evidence. Claudia Sahm points out, “Appeasement is not an effective strategy for Trump,” noting that Barr, for example, resigned previously in an attempt to relieve pressure but didn’t succeed.

Market history also shows that investor tolerance for overly loose policy is limited. From the start of the Fed’s rate-cutting cycle at the end of 2024 to January 2025, the 10-year US Treasury yield rose cumulatively by about 115 basis points; after the Fed paused rate hikes in 2023, the market sold off Treasuries again amid doubts that tightening hadn’t gone far enough.

More crucially, current inflation does not support a pause. The PCE inflation rate is at 3.7%, well above the 2% target, and the cooling process has stalled since late 2024, with over half of all PCE components still rising at an annualized rate above 3%.

No matter whether inflation is attributed to energy shocks from Middle East conflict or surging computer equipment prices driven by the AI investment boom, one reality remains: some shocks are turning into persistent pressures. Maintaining public confidence in price stability remains a duty the Federal Reserve cannot avoid.

Scenario 3: Walsh Leads Rate Hike to Defend Credibility with Action

The path with the highest market probability, and considered the "least bad option," is for Walsh to lead a rate hike.

Walsh’s speech at Jackson Hole last month was widely interpreted as a strong hawkish signal. He stated explicitly, "We must be confident that underlying inflation is moving clearly and fast enough toward the target... Otherwise, we have more work to do." In view of the current inflation situation, this stance already provides policy justification for a rate hike.

But to actually implement such action requires considerable political courage. Trump has forcibly linked rate policy with trade policy, threatening to cut off trade with countries running deficits with the US if the Federal Reserve does not cut rates. The White House may respond by further escalating legal pressure or launching a new round of economic interventions.

Nevertheless, from the perspective of preserving long-term institutional credibility, a rate hike may still be the more reasonable choice. If the Federal Reserve abandons inflation control due to political pressure, the loss of credibility in the bond market could prove far more damaging than criticism from the White House.