Next Wednesday, the Fed will announce its interest rate decision, and this meeting could serve as a true test of whether Chairman Worsh remains true to his mandate.
With surprisingly strong U.S. labor data for August, with 162,000 nonfarm jobs added versus expectations of just 55,000, the odds of a rate hike have risen above 60% again. If August CPI tops 3.4% headline and 2.5% core, the case for higher rates gets even stronger, especially as Worsh has signaled he will take a tough stance on inflation.
The problem is that Trump is back in the game, pushing for lower rates and threatening to halt trade with countries where the U.S. runs a deficit. His threats haven’t worked before, but who knows, maybe this time they will. If they do, though, that would add more headwinds, especially with no solution to the Middle East crisis and trade wars flaring up again. Both the dollar index and oil prices remain highly sensitive to these geopolitical risks and incoming economic data.
As for Trump’s claim that the U.S. secured “the largest oil deal in world history” and gained control of most of Venezuela’s 65+ billion barrels of proven reserves, it’s unlikely to boost U.S. oil supplies or bring gasoline prices down anytime soon. Venezuelan crude is extremely heavy and hard to produce, while the country’s oil infrastructure needs major repairs.
Rystad Energy estimates that restoring production to 3 million barrels a day would cost around $183 billion and could take until 2040. Even reaching 2 million barrels a day would require at least $41 billion and likely take until the 2030s.
No wonder the global bond market remains under pressure, with inflation risks still high and major central banks expected to keep policy tight.
Now, if Worsh goes against expectations and holds rates despite all this, it could raise serious questions about the Fed’s independence and weigh on dollar assets, just like previous attacks on Powell did.
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