By Ann Saphir and Howard Schneider
Sept 4 (Reuters) - Between a strong jobs report Friday that adds to the case for U.S. interest-rate hikes and a novel threat from President Donald Trump to stop trade with some countries unless the Federal Reserve cuts rates, Fed Chairman Kevin Warsh faces a squeeze: risk presidential ire by tightening monetary policy at the central bank's meeting in two weeks, or skip it and risk a hit to credibility after his own recent hawkish rhetoric.
The decision, ahead of November
elections in which Trump's Republican party is defending slim majorities in Congress, will likely hinge on whether next week's inflation reports show price pressures continue a recent cooling trend, or stay too hot for comfort.
Inflation has run above the Fed's 2% target for 5-1/2 years, and last Friday Warsh said he needs confidence it is moving back to target "clearly and at sufficient speed. Otherwise, we have work to do," a message widely seen as cracking the door open to a rate hike at the Fed's September 15 to 16 meeting.
"The Fed Board, with its great new leader, must get smart - BE PATRIOTS for a change," Trump said in a Truth Social post Friday shortly after the Bureau of Labor Statistics reported that employers added nearly three times as many jobs in August as economists had expected.
"High interest rates put the U.S.A. at a very unfair disadvantage, and I won't allow that to happen!" said Trump, who has repeatedly demanded that the Fed cut rates but has refrained from excoriating Warsh personally for not doing so, as he did with Warsh's predecessor Jerome Powell.
"A STRONG COUNTRY MEANS A LOWER INTEREST RATE - IT’S A BETTER CREDIT…Very simple!" he said in language running counter to standard economic thinking, where a healthy economy coupled with high inflation should mean tighter, not looser, monetary policy.
On Friday, he aimed his fire at U.S. trading partners, on which he has levied sharply higher tariffs that have contributed to price pressures more recently exacerbated by an escalation in the U.S.-Iran conflict and a boom in AI-related investment demand. Both the latter have pushed up longer-term U.S. Treasury yields, making government borrowing more expensive and exacerbating an affordability crisis for U.S. households that is eroding Trump's political support.
"We should have the LOWEST RATE of any country in the World ... LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT," Trump said. Such a trade embargo would be the type of action that could send the global economy into a slump and cause a recession in the U.S.
Trump's demands notwithstanding, focus has sharpened on an interest-rate hike. The latest jobs report showed nonfarm payrolls surged by 162,000 jobs last month and workers flooded back into the labor force.
Labor force participation rose to 61.6%, driven by a 300,000 jump in the number of people moving from the sidelines directly into a job, and a drop in the number of workers or job seekers leaving the labor market.
The increase in the labor pool kept the unemployment rate steady at 4.1% for arguably healthy reasons -- more people working or looking for work after a period of decline attributed to tougher immigration rules and enforcement. Black unemployment, which typically runs higher than the overall rate, dropped to 6% in August after spiking to as high as 8% last fall.
Growth in hourly earnings, at 3.1%, by contrast stayed in a range consistent with the Fed's 2% inflation target.
Fed officials have in recent months characterized the labor market as solid but with wage growth not seen adding to inflation pressures.
While strong, this latest jobs report may not change that overall conclusion, putting the onus on next Friday's consumer price data to potentially seal the case for a rate hike or, if it comes in weak, boost the argument to remain on hold.
"The upshot of today’s numbers is that the September FOMC meeting remains finely balanced," Pantheon Macro economists wrote, referring to the rate-setting Federal Open Market Committee at the central bank, which next meets September 15 to 16. "FOMC members have uniformly signaled that inflation data will determine their next policy steps."
Traders had ratcheted up bets on a September rate hike last week after Warsh's remarks, though this week several of his colleagues sounded more comfortable with staying on hold.
Fed Governor Christopher Waller on Thursday told Reuters NEXT that he would support keeping rates steady in the 3.50%-3.75% range if next week's batch of inflation data, which also includes the producer price index, shows price pressures are continuing to moderate. Friday's jobs report would likely be "satisfactory," he said, signaling it would have little impact on his own view of the proper rate path.
"Even the most committed dove would struggle to find anything in the August employment report to justify keeping interest rates unchanged," Capital Economics analysts wrote. "The prospect for a rate hike this month still depends much more on the August CPI and PPI data next week, but the strength in the labor market means we’ll only need to see data that are consistent with a moderately above-target-consistent gain in the core PCE deflator to shift our forecast back to a September hike."
After the jobs report traders on Friday nudged up bets on Fed rate hikes, with short-term interest-rate futures prices now implying about a 62% chance seen of an increase this month, up from about 55% before the report.
“While Fed officials have communicated that they are squarely focused on the inflation readings, today’s strong employment report also provides additional support for rate hikes this year,” wrote Nationwide Chief Economist Kathy Bostjancic. “We now see two, 25 basis-point rate hikes by year-end, lifting the fed funds rate to 4–4.25%.”
(Reporting by Ann Saphir, Michael S. Derby, Howard Schneider, Lucia Mutikani, Susan Heavey and David Ljunggren; Editing by Peter Graff, Andrea Ricci and Aurora Ellis)
