Fed's First Rate Hike in Three Years May Intensify Walsh-Trump Conflict
The Federal Reserve will announce its interest rate decision on September 16, with the market widely expecting a 25 basis point hike, raising the target range to 3.75%-4.00%. This will be the first rate increase since July 2023, ending the previous cycle of rate cuts or inaction. Chair Walsh's hawkish statements are in direct conflict with the Trump administration's ongoing pressure for rate cuts.
The implied probability of a September rate hike in CME Fed Fund futures was only 58% on August 31, but rose to 92.7% by September 15. Deutsche Bank strategists noted that if the Fed chooses to remain on hold at this time, it would be the "largest dovish surprise in any scheduled meeting since 1994." Macquarie has brought forward its baseline forecast for the first 25 basis point hike from December to September, while Bank of America is also betting on a September hike, and UBS expects two rate hikes in 2026 (September + December).
Supporting the rate hike expectations are economic data: 162,000 new non-farm jobs were added in August, and the unemployment rate remained unchanged at 4.1%; the inflation rate over the past 12 months was 3.4%, still significantly above the Fed's 2% target. Two major factors driving up prices have been repeatedly mentioned: the Iran conflict causing a surge in global energy prices, and the ongoing AI capital expenditure boom pushing up price levels.
Walsh's political situation is particularly delicate: he was sworn in on May 22, 2026, becoming the first Fed Chair to be sworn in at the White House since Greenspan in 1987, with a Senate confirmation vote of 54 to 45, the closest in history for the position. Trump's initial choice of Walsh was explicitly to facilitate rate cuts, but at the Jackson Hole meeting on August 28, Walsh stated that inflation was "concerning" and that the Fed "still has work to do," which was interpreted by the market as a signal for a rate hike. Trump subsequently stated on social media: "High rates put America at a significant disadvantage, and I will not allow this to happen!" He called for the Fed Board to "change its style and be patriots," threatening to "stop trade with countries with trade deficits" if rates do not decrease.
Before the decision, the market showed signs of risk aversion: on September 15, the Dow closed down 0.6% at 52,092 points, the S&P 500 fell 0.5% to 7,585 points, and the Nasdaq dropped 0.8% to 25,981 points; the 10-year U.S. Treasury yield hit a 52-week high of 4.998% (reaching as high as 5.041% during the day), the 2-year yield was at 4.656%, and the 30-year yield was at 5.346%; WTI crude oil rose 3.2% to $103.29 per barrel. Cryptocurrencies and gold faced pressure simultaneously—after Walsh's hawkish statement on August 29, Bitcoin fell 3% in one day, dropping below $77,000, having previously rebounded from around $63,000 to above $80,000; gold also fell on the same day.
In terms of capital flows, this round represents a typical event-driven sell-off: the bond market continued to sell off as the probability of a rate hike rapidly increased, pushing yields to a 52-week high, reflecting investors re-pricing term premiums in light of war, tariffs, and capital competition among mega AI firms (in the words of Wells Fargo strategists); stock investors actively reduced risk exposure before the decision announcement; the strengthening dollar and real interest rates directly suppressed the attractiveness of gold and Bitcoin as "currency devaluation hedges." Beneficiaries are those holding cash and short-duration assets, as well as banks relying on interest rate spreads; those under pressure include leveraged growth stocks, crypto assets, and the Trump administration itself—its political narrative of "low rates ensuring housing affordability" (previously emphasized by Vice President Vance) is being directly contradicted by market pricing.
Source: Public Information
ABAB AI Insight
Walsh served as a Fed governor from 2006 to 2011, during both the Bush and Obama administrations, and was one of the core decision-makers known as the "Four Horsemen" during the 2008 financial crisis (alongside Bernanke, Cohen, and Geithner), deeply involved in key decisions such as the acquisition of Bear Stearns by JPMorgan, the bankruptcy resolution of Lehman Brothers, and the AIG bailout. He has long held a hawkish stance: publicly opposing Bernanke's $600 billion QE2 bond-buying program in 2010 and maintaining a skeptical view on quantitative easing; after leaving office, he criticized the Fed for being "too slow" to cut rates post-pandemic—his position has consistently centered on "prioritizing inflation control," regardless of changes in the ruling party.
After leaving the Fed, Walsh joined the Duquesne family office, led by Stanley Druckenmiller, as a partner, entering one of the world's most aggressive macro hedge fund systems; he also serves on the boards of UPS and Coupang, both of which are interest rate-sensitive industries, and held a position at Stanford University's Hoover Institution from 2011 to 2026—a conservative think tank favoring tight monetary policy rules, continuously providing theoretical ammunition for the stance of "rules over discretion." According to the New York Times, the Trump team selected Walsh after a "carefully designed selection process," explicitly aiming to leverage his market credibility to endorse rate cuts; however, Walsh is now using that very credibility to resist political pressure for premature rate cuts—the same capital (reputational capital) is being deployed in a direction contrary to the initial intentions of the investors.
This situation closely resembles historical instances of "Fed Chairs confronting Presidents": in the early 1980s, Volcker resisted pressure from the Reagan administration to maintain tight monetary policy, and the more frequently cited counterexample—the Fed under Burns in the 1970s is believed to have compromised to political pressure from Nixon, directly igniting "stagflation." Walsh himself has publicly cited the Burns case as a cautionary tale multiple times. The Senate confirmation vote of 54 to 45—the closest in history for the position—indicates that his institutional moat is very thin, and his situation is akin to being parachuted in by activist investors only to find that he must persuade the board rather than the nominators. The current Fed is at a turning point from "expansion to control": the prosperity driven by AI capital expenditure (with the unemployment rate still steady at 4.1%) combined with rising energy costs due to war is forcing the central bank to shift from an accommodative stance to a tightening stance, structurally comparable to the "opportunistic anti-inflation" rate hike cycle mentioned by Deutsche Bank in 1994 under Greenspan.
This essentially represents a structural change in pricing power flowing back from the executive branch to the technocratic central bank, even though this chair is appointed by the administration. The mechanism is that once in office, the head of an independent agency must maintain their credibility and position through continuous recognition from the market and the Senate, rather than the goodwill of the executive branch—now, with over 90% probability of a rate hike priced in, the bond and options markets are effectively voting on his credibility every day, and this disciplinary constraint is stronger than any social media shout. If Walsh succumbs to Trump's pressure at this time, he will face the same risk of credibility collapse that Burns did, potentially triggering the inflation spiral he is supposed to prevent—this institutional structure is, in essence, overriding the political intent that appointed him.
ABAB News · Law of Cognition
Who appoints you does not determine who can dismiss you
Credibility is meant to be spent; spending it in the wrong direction becomes a debt
The market votes with prices, while politics only votes with words