Fed Poised to Raise Rates for First Time in Three Years, Defying Trump

The Federal Reserve is widely expected to raise its short-term interest rate on Wednesday, the first increase in three years, as it moves to contain inflation that has remained stubbornly high. The decision would put the central bank at odds with President Donald Trump, who has pressed for a rate cut.

The Fed's benchmark rate currently sits at about 3.6%. A hike is not guaranteed: Chair Kevin Warsh does not offer the forward signals his predecessors did. Even so, most analysts and economists expect one, particularly after Warsh argued at the Fed's annual conference in Jackson Hole, Wyoming, two weeks ago that the central bank had not yet succeeded in bringing inflation to heel.

A hike would mark another sharp turn in a volatile stretch for the economy and financial markets. As recently as March, the Fed had projected a single cut this year. But with the Iran war flaring up again and driving oil and gas prices sharply higher, inflation is likely to stay above the Fed's 2% target for longer.

"I don't see any end to the war in Iran right now," said Kristin Forbes, an economist at MIT's Sloan School. "Given what everyone has been through in the last few years of high inflation, consumers are more sensitive, companies are more sensitive, they raise prices faster ... The risks are much more on more persistent inflation than it falling quickly."

Surging investment in AI data centers has also added to inflation and pushed longer-term interest rates higher, though leading companies are now discussing slowing the technology's development.

The expected move lands just seven weeks before midterm elections in which high prices and affordability have become central issues. Trump has demanded a cut, which is not on the table, saying on Sunday that "the United States is so strong we should be paying the lowest interest rate in the world." He repeatedly attacked Warsh's predecessor, Jerome Powell, in harshly personal terms, breaking with decades of tradition that treated the Fed as independent.

Kevin Hassett, Trump's top economic adviser, said on CNN on Sunday that the president "100% respects the independence of Kevin Warsh." In a Fox News interview, however, Hassett suggested the Fed should not hike so close to the midterms. "I'd be wary of a rate hike ... I think if you want an independent Fed, then one thing the Fed does is it stays out of the way of elections," he said.

Financial markets expect Warsh and the central bank to disregard such warnings. Traders now see a 90% chance of a hike on Wednesday, according to futures prices, a figure that jumped after Friday's inflation report showed prices still rising firmly and core inflation, which excludes volatile food and energy, picking up in August from the previous month.

After that report and Warsh's tough inflation talk late last month, most economists argue he must hike or risk damaging his credibility with markets. Longer-term rates, such as those on 10-year and 30-year Treasury bonds, could spike if he does not, as they did after a late-July Fed meeting when Warsh failed to convince markets he was willing to lift rates if needed.

"At the end of the day the Chair's repeated stern warnings on inflation intolerance risk institutional credibility absent some action to back it up," Michael Feroli, an economist at JPMorgan Chase, wrote in a preview of the meeting.

Some members of the Fed's rate-setting committee still expect core inflation to fade over time and may see no need for a hike. Warsh has not made that argument. In his Jackson Hole remarks, he said recent inflation reports "do not tell me that underlying trends have improved," adding that if improvement did not appear soon, "we have work to do."

By bolstering the Fed's credibility, a hike could ironically hold down the longer-term rates consumers pay on mortgages and auto loans. Part of the recent rise in mortgage rates likely reflected investor concern that the Fed was not committed to fighting inflation, since investors typically demand higher yields when inflation is elevated.

If the Fed does raise rates on Wednesday, Warsh will face new questions: how many hikes will follow, how effective they will be when much of the inflation stems from oil prices the Fed cannot control, and what the central bank would do if an AI slowdown threatened to cool the economy, which would normally prompt cuts.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said it is rare for the Fed to lift its key rate just once, since a single move would have little economic impact, making multiple hikes likely. How the Fed frames possible increases on Wednesday could signal its next steps, he said. If Warsh suggests the Fed is unwinding the three cuts it made in late 2025, when it feared rising unemployment, that would imply two more hikes are needed. Alternatively, Warsh could cast a hike as "risk management," with the Fed expecting inflation to cool but raising rates to ensure it does, which could point to possibly just two increases.

Warsh has so far resisted offering such guidance. Wall Street traders expect three hikes, in September, December and March, according to futures prices.