US Market: Fed rate hike looms as hotter inflation clouds policy outlook

The US Federal Reserve is widely expected to raise interest rates by 25 basis points on Wednesday, as stubborn inflation and oil prices above $100 a barrel strengthen the case for tighter monetary policy and put Chairman Kevin Warsh in a difficult position, Reuters reported.

The Fed is scheduled to announce its policy decision at 2 p.m. EDT (1800 GMT) after a two-day meeting. Financial markets are pricing in a strong probability of a quarter-point increase in the benchmark rate to a 3.75%-4.00% range, with investors also looking for signals that further tightening could follow.

The expected move would present a challenge for Warsh, who has led the Fed's rate-setting committee since taking charge in May. President Donald Trump appointed Warsh with an expectation that he would lower borrowing costs, although Trump has so far blamed other Fed officials rather than the chairman for the lack of rate cuts.


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A rate increase could also have political implications ahead of November's congressional elections, when Trump's Republican Party is defending narrow majorities in Congress.

According to Reuters, Warsh could face growing pressure to provide some indication of the likely path for interest rates if the Fed raises rates and policymakers' projections point to another increase later this year. Analysts expect him to balance his preference for avoiding forward guidance with questions about the outlook for monetary policy.

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The policy outlook has shifted significantly over the past few weeks. Earlier in September, some Fed officials had pointed to cooler inflation readings in June and July as evidence that price pressures were moving gradually toward the central bank's 2% target, Reuters sid in the report.

However, hotter-than-expected inflation data last week changed the backdrop. Core consumer prices, which exclude food and energy, increased 0.3% in August from the previous month, a pace that remains inconsistent with the Fed's inflation target.

The inflation challenge has been compounded by a sharp rise in oil prices following renewed hostilities in the Middle East. Crude prices have climbed above $100 a barrel, raising concerns that higher energy costs could prolong inflationary pressures.

Reuters reported that the latest inflation data and higher oil prices could make it harder for the Fed to conclude that underlying inflation is moving toward 2% at a sufficiently fast and sustained pace.

Several Fed officials had already favored higher rates at the central bank's July meeting. Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari dissented from the decision to keep rates unchanged.

Other policymakers have also indicated that they would support a rate increase if progress on disinflation failed to resume soon.

Warsh has repeatedly emphasized the Fed's responsibility for maintaining price stability. His focus on inflation and financial market pricing could make it difficult for him to justify keeping rates unchanged when markets have already placed heavy odds on a hike.

Some economists believe the chairman could still secure a majority for a pause, given that many policymakers may be reluctant to oppose the new Fed chief so early in his tenure. But the latest inflation data, elevated oil prices and Warsh's own previous comments have strengthened expectations that the central bank will opt for a hike.

Reuters reported that economists see the decision as a delicate balancing act for Warsh, particularly if the Fed's projections indicate another increase later this year. A September hike could therefore mark not only a reversal in the direction of U.S. monetary policy but also an important test of how the new chairman communicates the path ahead.

The decision will be closely watched by financial markets, with investors assessing whether the Fed's move signals the beginning of a broader tightening cycle or a limited response to renewed inflation risks.