The recent significant shift in market expectations regarding Federal Reserve policy has drawn widespread attention. It was widely predicted that newly appointed Fed Chairman Kevin Warsh would face strong dissatisfaction from the Trump administration if he failed to quickly push for interest rate cuts. However, according to the latest reports, the White House appears to have signaled a more tolerant stance towards potential rate hikes. This signal was primarily conveyed through public statements by Treasury Secretary Scott Bessent, indicating a new development in policy communication that could potentially influence the future direction of financial markets.



Finance Minister gives "green light" signal

In a speech to business leaders in New York, Treasury Secretary Bessant made it clear that he trusted Walsh and implied that Walsh had independent decision-making space.

Bessant said, "Wash will optimize the path of inflation and economic growth. He will be independent and will do what he believes is right."

This statement was interpreted by Neil Dutta, head of the economic research firm Renaissance Macro, as giving Warsh the "green light," allowing him to take necessary measures based on economic data, including a possible interest rate hike. Following last week's Federal Reserve meeting, the market was surprised to find that several officials had shifted their support to raising interest rates this year. Nine officials included the option of a rate hike in their forecasts, with six of them expecting more than one rate hike. Although Warsh himself did not participate in the dot plot forecast and avoided direct comment at the press conference, his repeated emphasis on the Fed's firm commitment to stabilizing inflation further strengthened market expectations of policy tightening.

According to the Atlanta Fed's market probability tracking tool, investors currently believe there is a greater than 75% chance of an interest rate hike this year. Bessant also added in the interview that Trump has "full confidence" in Warsh, quoting the president as saying he hopes Warsh will "do the right thing." These statements have eased previous concerns about a potential conflict between the White House and the Federal Reserve.

Historical lessons and the current economic context

Bessant specifically mentioned the case of the "one-step-brake" rate hike led by Alan Greenspan in early 1997, arguing that it did not hinder economic expansion but instead created conditions for the subsequent three rate cuts.

This historical analogy suggests that the current environment may be suitable for a similar moderate tightening adjustment, controlling inflation without harming economic growth. In the economic projections released by the Federal Reserve last week, median officials also favored only one rate hike before the end of 2026, followed by a shift to rate cuts in 2027, reflecting a gradual policy path. The current economic situation, facing rising core inflationary pressures and the additional impact of the previous conflict with Iran, has prompted policymakers to reassess the interest rate path. Bessant expects the US economy to grow by 3% this year and believes that inflation will gradually decline as war-related agreements are implemented. He also emphasized that Trump respects the bond market, believing that the bond market has "toppled more governments than cannons," demonstrating a high degree of attention to market signals.

Trump's overall stance and future prospects

Despite the White House sending flexible signals through Bessant, Trump himself remains committed to his consistent stance.

Later Wednesday evening, Trump reiterated to reporters at the White House that interest rates should be lowered sooner to support the housing market, emphasizing, "Lower interest rates and you can have all the housing you want."

This statement indicates that Trump's personal preference still leans towards easing, but it did not directly deny Warsh's independence, and the overall policy coordination seems to be seeking a balance. In summary, the White House's statement provides the Federal Reserve with greater room for maneuver, helps reduce political interference, and allows monetary policy to focus more on its dual mission—controlling inflation and maintaining job market stability.

Whether the Federal Reserve will implement its first interest rate hike in three years in September remains to be seen, depending on subsequent economic data and communication with policymakers.

This development could reshape financial market expectations and provide new ideas for the long-term stability of the US economy.