The most consequential sentence in Friday’s Journal is not the one the president said. It is the one about his own staff. Nick Timiraos and Brian Schwartz report that when President Trump told reporters in North Carolina about a phone call he had made to Federal Reserve Chairman Kevin Warsh before Wednesday’s decision, several senior administration officials were hearing about it for the first time.
The call itself, according to a senior White House official, began as a friendly catch-up and turned to the expected increase. The president’s account of what he said: “I said, ‘You might as well vote with the board because it’s not going to matter.’” Warsh, he added, has “a very tough board” opposed to the White House.
Why the framing is doing work
Read plainly, the president is describing himself as having waved the decision through — casting a rate increase he spent months campaigning against as something he permitted rather than something that happened to him. Michael Strain of the American Enterprise Institute called it an attempt to save face, and said the suggestion that Warsh isn’t leading his own committee struck him as “both outrageous and false.”
Warsh declined at his news conference to discuss any conversations with the president, and described the increase as the product of the Fed’s own deliberations: “a sober decision, serious decision, responsible decision, one that we have been preparing for and thinking about” since he arrived in May. He has said repeatedly he will be guided by economic conditions, not politics.
Not everyone in the administration accepted the outcome as gracefully. Trade adviser Peter Navarro told the Journal he was “trying to figure out why Warsh would make a decision that’s so ahistorical and so contrary to the underlying economics,” adding that the chairman “could signal in the remarks that you were more on the side of not raising rates but just going along.”
The part with a date on it
A senior administration official told the Journal that if the Fed raises again in October — right before the midterm elections — Warsh could face increased scrutiny from the president and his advisers.
That sentence is the whole story compressed. Wednesday’s peace held because the decision could be narrated as consent. A second increase, in the week before an election, is much harder to narrate that way.
Our read
Markets treated all of this as approximately free. The dollar barely moved — the WSJ Dollar Index slipped 0.10% — and the 10-year yield fell six basis points, which is the opposite of what a market pricing political interference in a central bank normally does. Long-dated yields rise, the currency falls, gold runs. Gold did rise $13.90 to $4,360.20, but that is a modest move in a metal that has been bid all year.
So the honest read is that investors currently believe the institution is doing its job, and are pricing the phone call as noise. This desk agrees with that assessment and still thinks it is worth writing down, for one reason: the signal here is not any single headline, it is the term premium — the extra yield investors demand to lend for thirty years instead of two. Political pressure on a central bank shows up there first, quietly, and it shows up as a permanently higher cost of borrowing for everyone, not as a headline.
Nothing about that is tradeable this week. It is a reason the portfolios are short duration rather than long, which they already were for entirely separate reasons, and it is one more argument for owning a small permanent gold sleeve as insurance rather than as a trade. Neither of those positions changed on Thursday.