Warsh likely to side with financial markets over Trump as Fed rate hike expected

WASHINGTON (AP) — Barely four months into the job, Federal Reserve Chair Kevin Warsh is stuck between two strong and opposing forces: Financial markets that anticipate the central bank will raise interest rates, and President Donald Trump, who wants the Fed to cut them or leave them unchanged. Economists expect that on Wednesday, Warsh and his fellow policymakers will side with the markets. Warsh, economists say, has largely boxed himself into a rate hike after delivering a high-profile speech last month warning that inflation remains too far above the Fed’s 2% target and might require higher borrowing costs to bring it down.

A report last week showing inflation is still stubbornly high largely sealed investors’ expectations. Warsh has faced this dilemma before. Soon after becoming chair May 22, he delivered tough rhetoric on inflation, but in late July the central bank left its key rate unchanged.

After he provided little explanation for his decision at a press conference, investors pushed up longer-term interest rates, accelerating a process that is still ongoing. This week, the rate on the 10-year Treasury bond reached 5% for the first time in three years. Mortgage rates, which closely follow the 10-year Treasury, have also risen.

If the Fed doesn’t hike its key rate Wednesday, it risks a replay of what happened in late July, economists say. When investors expect inflation to stay high, they demand higher interest rates on government and corporate bonds to compensate. “That is the paradox: A hike now could lower long-term rates later,” Diane Swonk, chief economist at KPMG, wrote in an email.

“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.” A quarter-point rate increase would be the first in three years and push the Fed’s benchmark rate to about 3.9%. While campaigning for the top job last year, Warsh said the Fed could lower interest rates.

But since getting the nod, the Iran war has sharply raised gas prices, lifting inflation to 3.7% in July, according to the Fed’s preferred measure. In April 2025, before Trump’s tariffs, it had fallen to 2.3%. Core inflation, which excludes the volatile food and energy categories, was 3.3% in July, up from 3% just before the Iran war.