Trump failed miserably in the midterm elections, so did Walsh finally stop looking at the White House's face? The Federal Reserve's path to fighting inflation ushered in a critical turning point

The Zhitong Finance App learned that the total veto of Trump by voters in Tuesday's general election may lift a heavy political burden on Federal Reserve Chairman Kevin Walsh, allowing him to concentrate on pushing inflation back with less political interference.

This is the initial interpretation of many Federal Reserve observers. They said the Republican Party's fiasco in the election — where voters listed the cost of living as one of their main concerns — completely reversed the political game surrounding the Federal Reserve.

“Walsh and his team can now focus on implementing monetary policy,” said Mark Spindell, investment manager at Potomac River Capital, who has co-authored a historical book on the independence of the Federal Reserve. “Walsh wants to leave a good historical review, but they must act.”

Since Trump came back to power in 2024, pressure from the White House has always loomed over the Federal Reserve and its interest rate decisions. He has repeatedly called for interest rate cuts, pushed for an unprecedented criminal investigation into the Federal Reserve building renovation project, and attempted to remove a current board member.

In this context, Trump nominated Walsh to head the Federal Reserve in May. At the time, Walsh changed his previous position and instead supported interest rate cuts. This raised concerns on the Democratic Party side: the new chairman may succumb to the president's wishes and adjust monetary policy.

Concerns still exist

Walsh has taken a number of actions to try to dispel such concerns from the outside world. Against the backdrop of inflation exceeding the Federal Reserve's target for more than five years and accelerating again this summer, Walsh raised interest rates in September to counter those who suspected that he was unwilling to face political criticism. His statement after the Federal Reserve meeting in October also further strengthened market expectations for another rate hike in December.

Despite this, Walsh presided over the decision to keep interest rates unchanged on the eve of the midterm elections, even though the hot September inflation report had just been released. He insisted that the election did not work, but this move, along with his persistent reluctance to share the economic outlook, gave rise to lingering fears — that he was afraid to anger the president.

However, the fiasco in this election may change this situation.

PGIM's chief global economist and former senior Biden administration official Dalip Singh believes that this election is beneficial to the Federal Reserve, not only because it denies Trump, but also because it draws the attention of policymakers to the issues voters want to solve.

“The question is, will Kevin Walsh and the Federal Reserve read this signal and perform their duties when Trump's control over the country has loosened and voters have made it clear that the cost of living is the number one issue in this election?” Singh said on Wednesday, “Our opinion is, it will.”

Singh predicts that the Federal Reserve will raise interest rates by a full one percentage point within the next year.

Stephen Milo, managing partner of Beacon Policy Advisors and a former Treasury official in the George W. Bush administration, said that losing the election would also overwhelm Trump and the White House and weaken their will to keep an eye on the Federal Reserve.

“Trump has a lot of other difficult things to deal with next,” Milo said, “so the Federal Reserve will no longer be his focus as before.”

Post-Trump considerations

Meanwhile, Walsh may now focus more on the situation after Trump's term. His term as chairman will last until 2030, spanning the next administration.

“Walsh's tenure would have been longer than Trump's; he himself is motivated to withstand the pressure,” said Tim Dewey, chief US economist at SGH Macro Advisors.

However, other analysts warned that interest rates should not be assumed to follow a continuous upward trajectory.

“Looking back on the full set of actions of the Federal Reserve this year — suspending interest rate hikes, then suspending interest rate hikes. Even if everything is as usual and there is no continuous pressure to cut interest rates, this path is entirely likely to happen,” said Claudia Sam, chief economist at New Century Advisors. “I will make a very careful judgment: you can't assume that the Fed will start the interest rate hike cycle in a big way because the White House suffered a setback in the election.”

In fact, if the election results prompt Trump to stop the Iran conflict and abandon new tariffs, the Federal Reserve may not even need to continue raising interest rates. Sam said, “The final interest rate path may be lower than expected, rather than higher.”