Trump's Rate Cut Dream Shattered by Fed's Hike; Still Demands 'Faster Cuts' as Powell Cites Unimproved Inflation

U.S. President Trump once again publicly called for a significant reduction in interest rates, but the Federal Reserve (Federal Reserve) made the opposite decision on the 16th, raising interest rates by 25 basis points—commonly known as a 'quarter-point hike'—amid persistently high inflation and rising energy prices driven by Middle East conflicts. The federal funds rate target range was increased from 3.5%–3.75% to 3.75%–4.0%. This marks the Fed's first rate hike since July 2023 and the first major interest rate decision chaired by newly appointed Fed Chair Kevin Warsh. The Federal Open Market Committee (FOMC) unanimously approved the hike with a 12–0 vote and signaled in its latest economic projections that another rate increase later this year remains possible.

Following the Fed's announcement, Trump posted on his social media platform Truth Social, arguing that U.S. interest rates should not remain at current levels but should be drastically lowered to 1% or even lower. Trump wrote that U.S. rates 'should be 1%, or lower,' citing America's 'best credit in the world' and a surge in new investments. He reiterated his call for rate cuts, emphasizing 'and fast.' Trump also claimed the U.S. is essentially 'bearing the cost' for the rest of the world, a situation he insists must end.

The 25-basis-point hike raised the federal funds rate target range from 3.5%–3.75% to 3.75%–4.0%. In its post-meeting statement, the Fed noted that U.S. economic activity continues to expand at a solid pace, consumer spending remains resilient, productivity growth is strong, and business capital investment is steady. The unemployment rate showed no significant change.

However, the Fed emphasized that inflation remains elevated. Policymakers believe recent inflation data do not yet provide sufficient evidence that underlying inflation is moving toward the Fed's 2% long-term target at a satisfactory pace.

A majority of Fed officials expect at least one more rate hike this year. In a press conference, Chair Warsh stated that recent inflation data have not convinced him that underlying inflation trends have shown 'meaningful improvement.' Therefore, with inflation still above target, the Fed must maintain a restrictive monetary policy stance. This became one of the primary justifications for the rate hike.

In addition to the hike, the Fed's 'dot plot' revealed that policymakers' views on future rates remain hawkish. Of the 18 Fed officials submitting rate projections, 16 anticipate at least one more rate hike by year-end, while two expect rates to remain unchanged. The median forecast suggests a further 25-basis-point increase by year-end. This indicates the Fed is not signaling an immediate pivot to rate cuts after one hike but is leaving room for further tightening.

Some officials even anticipate two additional hikes this year, though this does not mean the Fed has pre-committed to rate hikes at every future meeting. Warsh stressed that future policy will depend on incoming data on inflation, employment, economic activity, and other indicators. The Fed's current signal is clear: with inflation still above 2%, policymakers remain cautious about pivoting to rate cuts.

The Fed also raised its inflation forecast for 2026. Using the preferred Personal Consumption Expenditures (PCE) price index, policymakers now project 2026 inflation at 3.7%, up from 3.6% in June—well above the Fed's 2% long-term target. While the forecast still assumes inflation will eventually return to 2%, the pace is slower than previously hoped. Warsh reiterated that summer inflation data have not shown 'sufficient improvement' in underlying trends.

This highlights a policy dilemma: even without clear signs of recession, the Fed must balance the risks of keeping rates too low—potentially fueling inflation—against the costs of further hikes, which could dampen economic activity by raising borrowing costs for businesses and households.

Rising energy prices due to Middle East conflicts have further complicated the Fed's inflation challenge. As tensions between the U.S. and Iran persist, energy supply and transportation in the Middle East have been disrupted, pushing global crude oil prices higher. U.S. gasoline and diesel prices have followed suit. Rising energy costs not only directly increase consumer fuel prices but also transmit inflationary pressures through transportation, manufacturing, agriculture, and logistics.

Higher energy costs have made the Fed's inflation challenge even more complex. If energy prices remain elevated, the path back to the 2% inflation target could slow further. Thus, the Fed must closely monitor how Middle East developments affect energy prices and inflation expectations, in addition to core inflation and consumer demand.

The U.S. economy remains resilient, with no significant cooling in consumption or business investment. The Fed noted that domestic consumption remains robust, productivity growth is strong, and business capital investment is steady. The unemployment rate has not changed significantly. This suggests the U.S. economy does not currently require aggressive rate cuts to avoid a sharp downturn.

The AI investment boom has also become a key pillar of economic activity. Major tech firms continue investing in AI data centers, chips, and related infrastructure, boosting capital expenditures and driving demand for electronic equipment and related products.

With consumption, business investment, and productivity still supported, the Fed is prioritizing the persistent above-target inflation.

The rate hike will increase borrowing costs for mortgages, auto loans, and credit. One direct impact of a Fed rate hike is higher short-term market rates, which gradually feed into household and business borrowing costs. While the federal funds rate is primarily an interbank lending rate, it influences other rates, affecting credit cards, auto loans, business financing, and some mortgage products.

With inflation still high, the Fed aims to reduce borrowing and spending demand through higher rates, cooling economic activity and easing price pressures. However, higher rates also increase the cost of capital for businesses and households, potentially dampening the housing market, business investment, and some consumer spending—a trade-off the Fed must continuously weigh.

Trump continues to demand sharp rate cuts but maintains trust in Warsh. In contrast to the Fed's current policy direction, Trump continues to push for aggressive easing. He argues that strong economic performance, rising investment, and America's high creditworthiness justify lower rates. After the Fed's hike, he reiterated that U.S. rates should fall to 1% or lower and demanded it 'and fast.'

Despite his sharp criticism of the Fed post-hike, Trump expressed continued confidence in Warsh. According to The Wall Street Journal, Trump described the Fed as 'very hostile' and 'very political,' but when asked if he still trusts Warsh, he replied, 'I trust.'

Trump revealed he spoke with Warsh before the decision and told the chair, 'You might as well vote with the committee because it won't make any difference.' He also stated he wants Warsh to maintain independence. This suggests Trump strongly criticizes the Fed's rate decisions and governance but separates that from his personal support for Warsh.

Warsh defended the rate hike, citing insufficient inflation improvement and economic resilience. He emphasized that recent data do not show 'sufficient improvement' in underlying price pressures, so the Fed cannot pivot to cuts just because the economy is strong. The Fed's current focus remains on gradually returning inflation to 2% while monitoring the impact of higher rates on spending, investment, and employment.

Warsh, during a Senate Banking Committee hearing in April, stated he did not promise Trump he would cut rates and emphasized his commitment to independent decision-making. This hike marks Warsh's first major rate decision as chair.

Trump continues to argue that U.S. economic performance and credit conditions justify lower rates. After the Fed's announcement, he again stated U.S. rates 'should be 1%, or lower,' and demanded rate cuts.