The US Federal Reserve is poised to raise interest rates for the first time in three years, a move that will test Chair Kevin Warsh's commitment to price stability amid persistent inflation and political pressure from President Donald Trump.
Economists and futures markets overwhelmingly expect a quarter-point increase when the Fed announces its decision on Wednesday, lifting the target range from 3.5%-3.75% to 3.75%-4%. The probability of such a move is priced at around 90%.
Warsh, who took office on 22 May, has signaled his hawkish stance since the Jackson Hole conference in late August, where he warned that inflation remained "too far above" the central bank's 2% target. Recent inflation data have reinforced expectations of a hike, with the personal consumption expenditures price index rising 3.7% year-on-year in July, up from 2.3% in April 2025.
A test of credibility
The Fed left rates unchanged in July despite Warsh's tough rhetoric, and the subsequent press conference offered little clarity. Since then, longer-term borrowing costs have climbed, with the 10-year Treasury yield surpassing 5% this week—a level not seen in years. Mortgage rates, which track Treasury yields more closely than the Fed's benchmark, have also risen, with the average 30-year fixed mortgage reaching 6.76% in the week ending 10 September, according to Freddie Mac.
Economists warn that another pause could trigger a market backlash similar to the one after July's meeting. Investors demand higher yields when they expect inflation to persist, and a failure to act could undermine the Fed's credibility.
"That is the paradox: A hike now could lower long-term rates later," said Diane Swonk, chief economist at KPMG. "Restore faith in the 2% target, then the inflation premium can fall. Fail, and markets will tighten instead through higher mortgage rates, business borrowing costs and interest on the debt."
Warsh's dilemma is compounded by political interference. Trump has repeatedly criticized the Fed for not cutting rates fast enough, and his administration has shown willingness to challenge the central bank's independence. The Justice Department even opened a criminal investigation into testimony by Warsh's predecessor, Jerome Powell, though it was later dropped.
White House economic adviser Kevin Hassett told Fox News on Sunday that Trump "is not going to be super happy" about a rate increase but would "defend the independence of Kevin Warsh above all."
For Warsh, the stakes are personal. "Kevin cares about his legacy," said Kristin Forbes, an economics professor at MIT and former Bank of England policymaker. "And he knows that Fed chairs who follow political pressure instead of the economy do not go down well in the annals of history."
Will one hike be enough?
Even if the Fed raises rates on Wednesday, the path forward remains uncertain. Central banks typically move in cycles, but there is precedent for a single increase: in March 1997, Alan Greenspan's Fed raised rates by a quarter point, only to hold steady and then cut three times in late 1998 as the Asian financial crisis unfolded.
Investors currently expect three hikes—in September, December, and March—but Jonathan Pingle, an economist at UBS, noted that the Fed could abandon further increases if data show inflation cooling. "They don't have to follow through on that if the data goes their way," he said.
All eyes will be on the Fed's updated quarterly economic projections on Wednesday, which will reveal where policymakers expect the benchmark rate to stand at the end of this year and next. The decision will also resonate beyond US borders, as higher US rates can strengthen the dollar and affect European markets, particularly for emerging economies in the region.
As Europe watches, the Fed's move will be a key indicator of how central banks balance inflation control with political pressures—a challenge that European institutions like the European Central Bank also face. The outcome could influence monetary policy discussions across the continent, from Frankfurt to Stockholm.
