Fed set to hike rates as inflation remains high, Warsh faces test

The U.S. Federal Reserve went into a key rate‑setting meeting this week, with markets expecting policymakers to pull the trigger on a 25‑basis‑point hike to tackle persistently high inflation. On Sept. 11, new data on consumer inflation for August showed it remaining steady at 3.4 percent, unchanged from the month before but still well above the Fed's long‑term 2 percent target. Market expectations of a 25‑basis‑point rate hike on Sept. 16 surged in the wake of the data, with the probability at more than 85 percent according to CME's FedWatch tool.

The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the tariffs' effects on prices ripple through the economy. In recent weeks, however, several Fed policymakers — including Warsh himself — have hinted that if inflation does not show clear signs of slowing, the central bank will have to act by raising interest rates. Warsh, appointed by Trump, faces a test of his credibility as he decides whether to raise rates next week or hold steady in line with what the White House prefers.

Analysts say the Fed could still hold rates steady rather than administer that medicine, but it would have to explain its decision clearly to markets. If they surprise markets and they can't explain why they're surprising markets, then Wednesday afternoon will be pretty messy. Since taking office, Warsh has changed the way the Fed communicates about its decisions, advocating for less transparency into the process as he thinks it locks policymakers into courses of action that may need to be adjusted.

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