US Market: Fed’s Warsh faces tough rate call as inflation remains sticky

Federal Reserve Chair Kevin Warsh is facing a difficult policy choice just four months into his tenure, with financial markets expecting higher interest rates while President Donald Trump has pushed the central bank to cut borrowing costs or keep them unchanged, AP reported.

According to the Associated Press (AP), economists expect Warsh and other Fed policymakers to opt for a rate increase at Wednesday's meeting, following recent signals that inflation remains above the central bank's 2% target.

Read more: Global Market Today: Asian stocks steady as traders await Fed decision

Inflation Keeps Pressure on the Fed

Warsh has increasingly emphasized the need to contain inflation. In a high-profile speech last month, he warned that price pressures remained too elevated and could require higher borrowing costs.

A recent inflation report showing that price growth remains stubbornly high has further strengthened expectations for a rate increase, AP reported.

The Fed's preferred inflation gauge showed inflation at 3.7% in July, compared with 2.3% in April 2025, before Trump's tariffs. Core inflation, which excludes food and energy prices, stood at 3.3% in July, up from 3% before the Iran war.

Higher energy prices following the conflict have added to inflationary pressures.

Read more: Global Market: Japan’s Nikkei flat as investors await Fed, BOJ decisions

Bond Yields Rise as Investors Reassess Inflation

Warsh confronted a similar challenge shortly after taking over as Fed chair on May 22. The central bank left its key interest rate unchanged in late July, while Warsh offered limited explanation during his subsequent press conference.

Investors responded by pushing longer-term borrowing costs higher. According to AP, the yield on the 10-year Treasury note reached 5% this week for the first time in three years.

Mortgage rates, which tend to track movements in the 10-year Treasury yield, have also increased.

Economists argue that a rate hike could potentially help bring down longer-term borrowing costs by reinforcing confidence that the Fed remains committed to its inflation target. Conversely, a decision not to raise rates could lead investors to demand higher yields if they believe inflation will remain elevated.

White House Pressure Adds to the Dilemma

The Fed's decision also comes amid sustained pressure from Trump, who has criticized the central bank for keeping interest rates too high.

AP reported that Trump's administration previously targeted former Fed Chair Jerome Powell over the pace of monetary easing. The Justice Department also launched an investigation into Powell over testimony before Congress, although the probe was later dropped.

Trump's top economic adviser, Kevin Hassett, has indicated that the president may not welcome another rate increase, while also saying Trump would support Warsh's independence.

For Warsh, the decision therefore carries implications beyond the immediate path of monetary policy. A move that appears responsive to political pressure could raise questions about the Fed's independence and its credibility with investors.

One Rate Hike or the Start of a Cycle?

A quarter-point increase would be the Fed's first rate hike in three years and would take its benchmark interest rate to around 3.9%.

However, it remains uncertain whether Wednesday's move would mark the beginning of a broader tightening cycle.

The Fed typically changes interest rates in a series of moves rather than making a single isolated adjustment. AP noted that one historical example came in 1997, when then-Fed Chair Alan Greenspan raised rates by a quarter percentage point in March.

The Asian financial crisis that erupted later that year prompted the Fed to hold rates steady, before the worsening crisis contributed to three rate cuts in 1998.

Markets Expect More Increases

For now, Wall Street investors are anticipating three rate increases, including potential moves in December and March.

However, UBS economist Jonathan Pingle said the Fed could change course if upcoming economic data shows inflation cooling, AP reported.

The central bank is scheduled to release its quarterly economic projections on Wednesday. The projections will provide investors with additional clues about policymakers' expectations for the benchmark interest rate at the end of this year and next.

The projections will therefore be closely watched for indications of whether the Fed views a potential rate increase as a one-off response to persistent inflation or the beginning of a longer period of tighter monetary policy.