Kevin Warsh is getting a big test to prove the Fed's independence

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A funny thing is probably going to happen this afternoon: The Fed will raise rates, and investors will cheer it on.

Normally, when the central bank raises interest rates, the market reacts the opposite way. Higher borrowing costs are basically kryptonite for businesses' growth plans.

Unfortunately for them, months of data have shown inflation isn't getting closer to the Fed's 2% target, and investors appear ready to take their medicine. The market has essentially priced in a rate hike — the CME FedWatch tool has the probability of one at almost 95%. And if investors really hate one thing, it's a surprise.

For more on all that, follow our live blog.

But there's another reason the market is hoping for a rate hike. It would go a long way toward signaling Fed Chair Kevin Warsh is committed to maintaining the central bank's independence and is willing to go against President Donald Trump's wishes.

The president has made it clear he wants lower rates, reiterating that point after last week's blowout jobs report. A booming job market would actually disincentivize the Fed from lowering rates, as it risks further fueling inflation, but I digress.

Most market experts believe the White House shouldn't influence the Fed. The focus should be on monetary policy, not politics. And concerns about whether that would remain the case under Warsh's leadership followed him throughout the nomination process.

This afternoon's decision will show whether those worries were warranted.

Things won't get easier for Warsh following today's decision.

The next time the Fed will make a call on rates is October 28. That's less than a week before the all-important midterm elections. There will be a lot of sensitivities around any monetary decisions made right before Americans head to the polls.

As it stands, the market is divided, with nearly 43% expecting a second rate hike in late October. It's worth noting that hikes or cuts commonly come in multiples as the central bank needs more than a one-off to address broader trends.

Traders will have plenty to chew on in the meantime, though. There's Treasury yield volatility, the gloom-or-boom of the AI trade, and the ongoing war in Iran. We'll also be in the thick of earnings season right when the Fed is ready to make its decision.

But let's not get ahead of ourselves. We've still got today's decision to worry about. Joe Ciolli, author of BI's First Trade, outlined the biggest storylines to watch heading into the decision.

Read the original article on Business Insider

Contributer : Business Insider https://ift.tt/Jlng4uc

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