Fed Faces Rate Hike Test as Inflation Stays High

The US Federal Reserve enters a key rate-setting meeting this week with financial markets expecting policymakers to raise interest rates to tackle persistent inflation, putting new Fed Chair Kevin Warsh's credibility under scrutiny.

The US economy has faced years of inflation above the Federal Reserve's long-term target, with prices pushed higher by energy shocks linked to US President Donald Trump's war on Iran, his tariff policies and the continuing artificial intelligence boom.

The Fed has kept interest rates unchanged since January as policymakers assessed the impact of higher energy prices and allowed the effects of tariffs to work through the economy.

However, several Fed officials, including Warsh, have indicated in recent weeks that the central bank may need to raise rates if inflation fails to show clear signs of easing.

New consumer inflation data released Friday showed prices rising 3.4 percent in August, unchanged from the previous month but still significantly above the Fed's 2 percent long-term target.

Following the data, expectations for a 25-basis-point rate increase at Wednesday's meeting rose sharply. According to CME's FedWatch tool, markets put the probability of a rate hike at more than 85 percent.

The Fed last raised interest rates three years ago while battling inflation that surged following the COVID-19 pandemic. The federal funds rate currently stands between 3.50 percent and 3.75 percent.

The expected decision comes amid continued pressure from Trump, who has repeatedly attacked the Federal Reserve over interest rates since beginning his second term and has called for lower borrowing costs to support economic activity.

Speaking to CNN on Sunday, Kevin Hassett, Director of the National Economic Council at the White House, said he and Trump believed there was no reason to raise rates at present. He also pointed to what he described as "progress" on inflation despite the latest inflation reading remaining elevated.

Hassett cited former Fed Chair Alan Greenspan and argued that the central bank should avoid intervening ahead of an election in order to protect its independence. Americans are due to vote in November's midterm elections, which could alter the balance of power in Congress.

Trump has taken unprecedented steps in his confrontation with the Federal Reserve, including launching a criminal probe into former Fed Chair Jerome Powell, seeking to remove another Fed governor and threatening to cut trade ties with certain countries if the central bank raises rates.

Warsh, who was appointed by Trump, now faces what analysts describe as his first major test as Fed chair: whether to raise rates to combat inflation or keep them unchanged in line with the White House's preference.

"This is the test. This is what comes with that job, and now he has to decide how to handle it," said David Wessel, a senior fellow at the Brookings Institution.

Wessel said Warsh risked either disappointing financial markets or provoking Trump's anger, depending on the decision.