Trump erupts as Fed raises rates and TX Senate race stuns

David Pakman (0:00)

Coming up today, Donald Trump demanded dramatically lower interest rates. And his handpicked Federal Reserve chairman has now done the opposite and has raised rates for the first time in more than three years. Kevin Warsh says the reason is inflation is too high.

Why is inflation too high? Well, we know why. And Donald Trump is not happy with them. Then something remarkable in Texas. The latest polling, not the betting markets. The polling has Democrat James Talarico leading in just about every single poll.

And the betting markets have now turned in its favor. Trump hits the campaign trail in North Carolina. He says the skyrocketing gas prices are a very small price to pay for what he wants to do in Iran. Nice of him to tell you that he's decided you're going to sacrifice. And then JD Vance has a very interesting midterm pitch, which is please give us one more chance. Plus, we have new video of Mitch McConnell.

He has returned to the Senate. It's not clear he can process language. We'll get to that. Scary. And Joe Rogan is now publicly criticizing much of what he endorsed Trump for, but he doesn't like the way it's being carried out. All of that and more today, if they'll allow it.

Things just got really awkward for Donald Trump with his handpicked Federal Reserve Chairman Kevin Warsh because he hired him to lower rates, but inflation is too high. And the Fed has now unanimously decided we are raising rates and it's coming at really an inconvenient moment for Donald Trump. We are around 50 days fewer than 50 days from the midterm elections. Cost of living is arguably the biggest concern for American voters. And all of the promises about cost of living from this administration have failed to materialize. And so now, for the first time in more than three years, the Federal Reserve said, we're not going to cut rates. We're not going to keep them the same. We are going to raise rates. And they voted to do that by a quarter point, bringing the target range to three point seven to five to four percent. The critical part of this story is for us to remember who is running the Federal Reserve right now. Kevin Warsh. Now, Donald Trump spent years attacking Jerome Powell and demanding lower interest rates and saying Powell isn't lowering them because he wants to hurt me. But Jerome Powell had strong economic justifications for not lowering rates. So Trump eventually replaced him by appointing Kevin Warsh. And the whole point was this guy is going to do the right thing. He's going to lower rates. We need them at one percent or even lower. And now Trump's own Fed chairman just participated in this unanimous vote to raise rates. Warsh explained very clearly why inflation is too high and it's been too high for too long. Remember Trump says inflation has been solved as an issue.

Kevin Warsh (3:11)

So the labor side of the Fed's congressional remit is in good shape. Yet for more than five years, inflation has been running above target. So our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high and has been for too long.

This summer's inflation readings do not tell me that underlying trends have meaningfully improved based on the most recent CPI and PPI data. All right.

David Pakman (3:45)

So let me explain the mechanics of this, because I don't want to assume, David, you're explaining things to people like they don't understand them. Well, I don't know if everybody understands this. Let me explain the sort of logic here.

If inflation is too high, why would the Fed raise this base rate? Here's why.

One of the reasons that inflation can be high is because tons of people are buying stuff at higher and higher prices. And so that can have an inflationary effect. The federal funds rate dictates what it costs to borrow money. So, in general, when the federal funds rate goes up, mortgage rates go up, car loan rates go up, credit card rates go up. This is speaking at the macroeconomic level.

When it gets more expensive to borrow money, fewer people do it. If fewer people borrow money to buy stuff with, that decreases demand pressure on prices. And so the idea is prices might come down or at least they might not go up as quickly. Think about it a different way. Imagine that when interest rates are five per when mortgage rates are five percent, you can afford a four hundred thousand dollar house. And because interest rates are five percent, a lot more people can afford a four hundred thousand dollar house. And therefore, the competition for that four hundred thousand dollar house raises the price of the house and bids it up inflation. If you change mortgage rates from five to six percent, that same four hundred thousand dollar house is now going to have a higher monthly payment. It is going to make it unaffordable for some people. It will decrease competition for that house. And therefore, it might sell for four hundred thousand dollars rather than creating a bidding war up to four hundred and ten thousand. This is the macro economic idea. And it's the most important aspect of what Kevin Warsh is saying. He's saying we haven't solved the inflation problem. We still have it. And it's not one bad inflation report. It's one inflation report after another. And we are not in a situation where lowering rates make sense. In fact, he's saying lowering rates might drive up inflation. Now, there's another very important part of this. The White House is arguing that all of these price increases are just energy and it's because of diesel and gas prices. And as a result, the administration is saying it's an unfortunate decision. It's only because of the energy supply shock. It's Iran. It's Russia, Ukraine. But Kevin Warsh made it very clear that that's not the case. He said it first of all, he acknowledged the Fed can't make oil cheaper. That's true. And it can't make groceries cheaper directly. But what they can try to do is prevent an initial increase in something like energy prices from spreading throughout the economy and creating these second and third or third order price increases elsewhere. So the concern isn't just oil is expensive. It's what happens if higher energy starts feeding into transportation, manufacturing, wages services, exactly as I have been telling you is going to happen. Now Reuters also reports that this new statement from the Fed removed earlier language saying that inflation is being primarily driven by supply shocks. It's actually a much broader situation at this point in time. And we will see what happens to inflation as a result of this decision.