Warsh raises rates for the first time in three years as Trump stands by Fed chair

October rate decision could renew White House scrutiny before midterm elections

The Federal Reserve raised interest rates on Wednesday for the first time in three years, drawing a mild response from President Trump, who publicly backed his appointed chair Kevin Warsh after months of attacking the central bank for keeping borrowing costs too high.

The president’s restraint marked the clearest sign yet that Warsh has, for now, reset a relationship in which the White House had treated the Federal Reserve as an adversary. Rather than object, Trump cast himself as having waved the decision through to spare Warsh the indignity of being outflanked by his committee. “I said, ‘You might as well vote with the board because it’s not going to matter,’” Trump said. Warsh has “a very tough board” that is opposed to the White House, Trump added.

The call between Trump and Warsh was news to many of the president’s close advisers, according to people familiar with the matter. Some senior administration officials first learned about the call when Trump told reporters about it Wednesday in North Carolina. The president reached out directly to Warsh in the days before the Fed board met, according to a senior White House official, with the conversation starting out as a friendly catch-up before turning to the expected decision.

Some senior administration officials had been unsure how Trump would react to the Fed’s increase. On Wednesday night at the Ned, a private Washington club frequented by administration officials, members pulled out their phones to watch clips of Trump’s comments about Warsh. Several administration officials at the club expressed relief that Trump did not attack the Fed chairman, according to a person who was there.

The accommodation may not last. A senior administration official said that if the Fed decides to raise rates again in October — right before the midterm elections — Warsh could find himself the object of increased scrutiny by Trump and his advisers.

Inside the White House, Trump’s account has already drawn criticism from his own advisers. Peter Navarro, a Trump trade adviser, said in an interview that he was trying to understand the rationale for the increase. “I’m trying to figure out why Warsh would make a decision that’s so ahistorical and so contrary to the underlying economics,” Navarro said. “The nuance here is you could do what the president suggested and sanctioned but you could do it in a better way,” Navarro added. “You could signal in the remarks that you were more on the side of not raising rates but just going along.”

Michael Strain, an economist at the American Enterprise Institute, called Trump’s account an attempt to save face. The suggestion that Warsh is not leading his own committee strikes him as “both outrageous and false,” Strain said.

For his part, Warsh declined at his news conference to discuss any conversations with Trump and described the rate increase as the product of the Fed’s own deliberations. It was “a sober decision, serious decision, responsible decision, one that we have been preparing for and thinking about” since he arrived at the Fed in May, he said. Warsh has said he would be guided by economic conditions, not politics.

The White House pushed back against suggestions that the president had directed the decision. “President Trump has repeatedly affirmed his confidence in Federal Reserve Chairman Kevin Warsh, and maintains his First Amendment right as an American citizen and duty as commander in chief to voice his opinions about policymaking,” White House spokesman Kush Desai said.

Warsh enjoys a closer relationship with Trump than his predecessor, Jerome Powell, whom Trump selected for the post during his first term. They “have a very close, long-term relationship…and they talk about the economy all the time,” Kevin Hassett, the director of the White House National Economic Council, said last month. Trump also interviewed Warsh for the job in 2017. People who have spoken with Warsh describe a chairman confident he can do what he thinks the economy requires while managing the president in ways that avoid explosive confrontations. He avoids saying anything that draws the administration into the Fed’s problems, and has spoken about the Fed’s independence as something to be practiced rather than proclaimed.

On Wednesday, Warsh said one reason for the increase was that the Fed’s judgment about how conflicts abroad were likely to unfold had changed, creating new risks of higher energy and commodity prices. “There’s no hiding from hot spots around the world,” he said. But he never mentioned the war in Iran, instead using the word “geopolitics.”

Warsh’s posture stands in contrast with Powell’s. Powell avoided cultivating a relationship with Trump, took the president’s calls infrequently and went to the White House three times when invited. He made clear he did not think the job included counseling the president on the economy — a stance that Trump read as stonewalling by an appointee who would not give him a hearing. Trump has long thought he should have a say in rate decisions. In December, as he weighed whom to name to the job, he told The Wall Street Journal: “I’m a smart voice and should be listened to.”

Powell had a honeymoon of about five months. After the Fed’s first rate increases in 2018, Trump said he was not thrilled but was comfortable because Powell was a good man. The attacks escalated through the fall as modest rate rises and growing trade tensions led the stock market to wobble.

Ellen Meade, a former Fed adviser and now a professor at Duke University, said protecting the Fed’s independence might now require managing the president rather than standing apart from him. That responsibility could include alerting the White House about unfavorable news ahead of time so that Trump doesn’t “fly off the handle immediately” after a policy announcement, she said. There is a clear line, though, between informing and asking, Meade said — a heads-up that keeps the White House from being surprised is one thing; seeking the president’s blessing for a policy decision, which would compromise independence, is quite another.

Meade said she did not see how Warsh could emulate Powell’s approach. “I don’t see how Warsh gets away with doing the job the way Powell did it,” she said. Even though Powell was not trying to provoke Trump, “it almost, in retrospect, looks like you’re picking a fight.”

What Warsh might be attempting has been done before. Former Chairman Alan Greenspan cultivated presidents and their advisers across four administrations while setting policy as he thought necessary, triggering a rupture with President George H.W. Bush in 1992. Bush publicly said the Fed was too slow to lower interest rates that year and later blamed his re-election loss on Greenspan. “I reappointed him, and he disappointed me,” Bush said in 1998.

Letting the White House think that Wednesday’s increase — and any that follow — are being forced on Warsh could be a dangerous game, Meade said, because it might invite the administration to step up efforts to remove other Fed officials. Trump last year attempted to fire Fed governor Lisa Cook; although the Supreme Court blocked the removal this summer, the White House has recently taken steps toward trying again. Trump cheered a criminal investigation of Powell earlier this year, which was dropped only after it threatened to hold up Warsh’s confirmation.

Some at the Fed are also uneasy about a coming report on the failure of Silicon Valley Bank, ordered up by Michelle Bowman, whom Trump last year tapped as the Fed’s vice chair of supervision. They fear its findings will be used by the White House as grounds to fire Bowman’s predecessor, Michael Barr, who remains on the board.