The Federal Reserve is raising interest rates to fight inflation that hurts Americans’ pocketbooks, but the move may also make voters feel the pinch in other ways heading into the November election.
There may not be a direct tie between the interest rates set by the Fed and mortgage and auto lending rates. But the Fed’s decision certainly won’t bring down the cost of housing, buying a car or paying off credit card debt. It won’t make it easier for American farmers already contending with record diesel prices and a surge in fertilizer costs to afford increased interest payments, all of which led the USDA this week to forecast a reduction in farm income for the year.
It is also designed to slow down the economy, something voters might not enjoy experiencing if it leads to jobs cuts.
While President Donald Trump opposed the rate hike, he’ll have to answer for any economic impact, even if his war on Iran and tariff policy helped create the inflation that led to it.
Trump has long groused about interest rates and elections.
He complained when rates were raised during his first term. And he complained when they were lowered before the 2024 presidential election. Earlier in his second term Trump publicly fantasized about firing the previous Fed Chair, Jerome Powell, but ultimately let his term as chairman expire and nominated Kevin Warsh, who Trump in January described as coming from “central casting” for the job.
But while the unanimous decision by the Federal Open Markets Committee Wednesday to raise rates will keep Trump at odds with Fed policy, it also shows that Warsh lives in the reality where inflation and higher costs continue to be a problem for the economy as a whole, and not in Trump’s reality, where inflation does not exist.
And Warsh’s Fed is expected to raise interest rates again this year. The next opportunity is in late October, just before Election Day.
At a press conference Wednesday, Warsh acknowledged the reality that Americans feel every day.
“This summer’s inflation readings do not tell me that underlying trends have meaningfully improved,” he said, arguing inflation has been hurting the country for five years.
That is a clear break from Trump’s reality
During his convention speech to Republicans last week in Dallas, Trump said “almost every item” is getting cheaper.
After the Fed’s decision Wednesday to raise rates, Trump, without mentioning Warsh, painted a picture of his own reality. He said on social media that rates should be much lower because the US economy is “BOOMING.” And he seemed to reiterate that if rates don’t come down, he’ll try to cut off a large portion of US trade with the rest of the world.
Even Vice President JD Vance seemed to acknowledge in a podcast interview Wednesday that things aren’t exactly going to plan.
“Give us another chance,” Vance said, when asked for his message to voters before November.
Unintended consequences
The rate cut may be the Fed’s best, and really only, tool available to combat inflation, but it’s a blunt instrument, according to John W. Diamond, director of the Center for Public Finance at the Baker Institute at Rice University.
“That means the rate increase may further slow the weaker parts of the economy, such as housing, while barely affecting the strongest, namely the relentless investment in artificial intelligence,” he wrote for The Conversation.
Trump’s defense of AI development and data centers is another issue that puts him at odds with many voters.
Live by the economy, lose by the economy
Trump and Republicans harnessed anger over inflation and worries about the economy to send Democrats packing in the 2024 elections.
Now, they have to answer for the fact that the GOP’s two years in power haven’t solved the problem, at least not in the eyes of voters.
Democrats have a clear advantage to retake the House of Representatives, according to a recent New York Times / Siena poll.
Not surprisingly, the economy and inflation were among the top issues cited by registered voters in that poll. The problem for Trump is that he has lost their support on those issues.
Three-quarters of registered voters say the economy is only in fair or poor condition; 73% disapprove of his handling of cost-of-living issues, and 62% disapprove of his handling of the economy in general.
House Minority Leader Hakeem Jeffries, Democrat of New York, might as well have been reading from that New York Times poll when he opened a recent news conference arguing that Trump promised a “golden age,” but delivered a “rotten age.”
“The economy is not going in the right direction, it is failing everyday Americans. Gas prices are up, grocery prices are up, interest rates are up, housing costs are up, and health insurance premiums are up,” Jeffries said.
Democrats are on offense in red states
Those economy numbers have a lot to do with why Democrats feel competitive in Senate races that once seemed safe for Republicans, particularly in heartland states like Kansas and Iowa. Democratic candidates like Rev. Adam Hamilton in Kansas and Josh Turek in Iowa are making populist pledges to focus on housing and energy prices. In Iowa, the Republican candidate Rep. Ashley Hinson is talking in ads about working across the aisle, not a very Trump message.
Trump’s policies have not helped the cost of living
Trump made promises to bring down costs two years ago, but the policies he pursued as president probably aren’t helping inflation.
► Fighting AI regulation has given Big Tech room to spend. Enormous borrowing and spending by AI companies has fueled significant inflation in chip prices, electricity and building supplies.
► Tariffs he promised and defended have made things more expensive. But rather than pull back, Trump is launching a trade war with Canada.
And the actions he has taken to address inflation have often angered his supporters. The Republicans running for Senate in Iowa (Hinson) and Kansas (Sen. Roger Marshall) both channeled ranchers when they expressed frustration with Trump’s decision to import more beef as a way to bring down meat prices.
► His war on Iran has fuel costs rising again. Iran-backed Houthis in Yemen have attacked oil infrastructure in Saudi Arabia. The price of diesel is at a new record, hurting farmers, the trucking industry and ultimately consumers.
► High prices are expected to continue. The Congressional Budget Office set the cost of the war at $38 billion and counting in a report released this week. Perhaps more importantly to American consumers is that CBO expects the war to drive up inflation next year, a bet that fuel prices aren’t coming down any time soon, counter to Trump’s assurances.
► Trump also wants to cut $5,000 checks to every American. His administration is looking for ways to do it without Congress. People would appreciate the check, surely, but it would also drive up prices.
This is the dichotomy of “America First.” Trump wants lower rates. But his presidency is built around a list of policies that, at least on paper, drive up costs.
Trump has not yet turned on Warsh
Trump ultimately turned on his first-term pick for Fed Chair, who he later viewed as a “jerk” for not lowering rates on Trump’s timeline or bowing to Trump’s constant pressure.
Who knows if Trump continues to pressure Warsh to lower rates. In an angry social media post after the Fed’s announcement, Trump said rates should be at 1% rather than targeted between 3.75% and 4% as the Fed made clear.
Trump said he did talk to Warsh before the Fed’s meeting.
“I talked to Kevin and I said, ‘you might as well vote with the board because it’s not going to matter.’”
Warsh, as chairman, is but one vote on the Fed board that set rates. But Warsh kept any counsel from Trump private.
“I’ve got nothing for you on a discussion with the president,” he told reporters.
Warsh may yet hold Trump’s trust because at heart he is thought to support rate cuts. It’s just that the economic reality, at the moment, is that prices are rising.
CNN’s David Goldman contributed to this report.
