Trump Rarely "Let Go" Wash: Inflation Soars to 4.2% but Declares "Great", Fed Enters Policy Respite Period

In the next few days, there may be a stark contrast in the U.S. financial circle: Federal Reserve Chairman Kevin Walsh may replicate the policy path of his predecessor Jerome Powell in interest rates, but receive a completely different attitude from President Trump. After the U.S. Bureau of Labor Statistics announced that the annual inflation rate soared to 4.2%, Trump unexpectedly stated in the Oval Office, "I love inflation." Faced with the highest inflation data in three years, Trump seemed unconcerned, which seems to suggest that the pressure from the market for the Federal Reserve to quickly cut interest rates has temporarily eased, giving Walsh a valuable buffer period. Over the past few years, Trump has consistently criticized and restrained Powell. In his view, Powell stubbornly refused to lower interest rates at a faster pace and a larger magnitude according to the demands of the White House. Now that Walsh has officially taken over as the Federal Reserve Chairman and will have his first interest rate decision meeting next week, Trump has repeatedly signaled that even if Walsh delays cutting interest rates, he will not interfere. Currently, the mainstream expectation in the market is highly consistent: the Federal Reserve will maintain the short-term benchmark interest rate unchanged at 3.5%-3.75%, a range that has not been adjusted since December last year. Since the outbreak of the Iran conflict in March, the shipping in the Strait of Hormuz has been disrupted, with many oil tankers struggling to navigate this crucial canal linking the Persian Gulf oil producing area to the global market, leading to a continuous rise in energy prices. Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hamack, and other Federal Reserve officials have recently stated that it is not appropriate to lower interest rates at the moment, and even believe that there is a possibility of a rate hike this year. The consumer price index (CPI) released on Wednesday showed a significant year-on-year increase of 4.2% in U.S. inflation in May. However, when Federal Reserve officials analyze the data, they tend to exclude short-term disturbances and weaken the warning signal of this increase: the core CPI, which excludes energy and food price fluctuations, only rose by 2.9% year-on-year. For most of the time in 2025, Walsh has advocated that breakthroughs in artificial intelligence technology are sufficient reasons for the Federal Reserve to cut interest rates. But at the Senate confirmation hearing in April, he admitted, "Inflation pressure is still the core concern for ordinary households and corporate boards." Until inflation risks completely disappear, interest rate cuts are unlikely to be considered. According to the conventional policy logic of the Federal Reserve, when inflation accelerates, interest rates should be raised. However, Walsh believes that the price increase caused by geopolitical conflicts is a special case. He said at the hearing, "What I am really concerned about is the core level of inflation generated internally by the economy, rather than the short-term price fluctuations caused by geopolitical conflicts, beef supply fluctuations, and other one-off events. What I want to assess is the general price changes in the economy." In the professional context of the Federal Reserve, this approach is called "ignoring" supply shocks - even if one-off disturbances like the Iran energy crisis last longer than expected, the Federal Reserve will let the market absorb short-term price fluctuations on its own. Trump happened to share the same logic as Walsh on Wednesday. When asked by reporters about the latest inflation data, he bluntly said, "The latest inflation data is great." Regarding the trend of inflation, Trump said, "When the war ends, inflation will quickly fall back, like a rock." This statement is consistent with his previous remarks: although he has long pressured Powell to significantly lower interest rates, he is now willing to let Walsh independently formulate interest rate policies. In an interview broadcast last Sunday, Trump said that he actually hopes to maintain higher interest rates, but at the same time, he said, "I allow Walsh to act according to his own judgment, I don't want to interfere too much with him." When Walsh was sworn in at the White House on May 22, Trump made similar remarks: "I hope Kevin has complete decision-making authority, just do your own thing and do it well." This statement represents a 180-degree turn from his previous attitude towards Powell, and more importantly, Trump has used various means to pressure Powell to adjust his policies. Trump has publicly demanded interest rates to be lowered to 1%, and even accused Powell of refusing to lower rates out of personal animosity. Last year, when talking about Powell, he bluntly said, "He is deliberately going against me," and even insulted the then Federal Reserve Chairman as "stupid." Powell later stated that he never took Trump's verbal attacks to heart. However, Trump's pressure did not stop at verbal insults: he tried to dismiss Federal Reserve Governor Lisa Cook on charges of mortgage fraud, prompting Cook to file a lawsuit to defend herself, and the Supreme Court is expected to rule on the case soon. Trump also claimed that the renovation project at the Federal Reserve headquarters had huge cost overruns, alleging "criminal activity" behind it. Columbia District federal prosecutor Jenna Pirro initiated a criminal investigation into these expenses and the testimony Powell submitted to Congress. A federal judge has already rejected the prosecution's subpoena and is expected to soon rule on Pirro's subsequent request to dismiss the entire case. Trump previously used all means to interfere with Powell's work, but now finds himself lacking leverage to balance Walsh. However, Walsh publicly stated at the beginning of his term that he is willing to listen to the President's views on interest rate policy, but the ultimate decision-making power still belongs to the Federal Reserve. The White House did not respond to emails about whether Trump and Walsh discussed inflation issues. However, Walsh has always been in contact with the government. During the confirmation process, he communicated with Treasury Secretary Scott Benet, and after assuming office, the tradition of regular meetings between the Federal Reserve Chairman and the Treasury Secretary began quickly. All signs indicate that the new Federal Reserve Chairman is in a rare period of policy "honeymoon." At the interest rate meeting next week, the market will be able to see how Walsh will use the relaxed external environment. The Federal Reserve also announced on Wednesday that Walsh will hold his first interest rate decision press conference on June 17 as scheduled.