Federal Reserve Chairman Kevin Warsh faces his first major challenge since taking office, as he must demonstrate how he intends to combat following US President Donald Trump’s conflict with Iran, his signature tariff policies, and the ongoing boom in artificial intelligence.
The Fed has maintained steady interest rates since January, opting to observe the impact of energy price shocks and allow the economic consequences of tariffs to fully materialize.
In recent weeks, however, several Fed officials—including Warsh himself—have signaled that if inflation does not show clear signs of cooling, the central bank will be forced to respond by raising interest rates.
On Friday, fresh data regarding consumer inflation for August indicated it remained steady at 3.4 percent. While this matches the previous month’s figure, it remains significantly higher than the Fed’s long-term target of two percent.
Market expectations for a 25-basis-point rate hike on Wednesday increased following the release of this data, with the probability now exceeding 85 percent.
The Fed last increased rates three years ago while battling surging inflation in the aftermath of the pandemic. Current rates are positioned between 3.50 and 3.75 percent.
Since beginning his second term, Trump has frequently criticized the Fed over interest rates, launching unprecedented attacks on the central bank’s independence as he pushes for lower rates to stimulate economic growth.
The US president has initiated a criminal probe against former Fed chair Jerome Powell, is attempting to remove another Fed governor, and has even threatened to sever trade ties with specific nations if the Fed proceeds with rate hikes.
Warsh was appointed by Trump, and analysts view this as his first genuine test: will the Fed raise rates to fight inflation, or will it remain steady to align with the preferences of the White House?
“This is the test. This is what comes with that job, and now he has to decide how to handle it,” said David Wessel, senior fellow at the Brookings Institution.
“He’s either going to completely disappoint the markets, or he runs the risk that he’s going to start to anger Donald Trump.”
The Fed’s Federal Open Market Committee, comprised of 12 voting members, is scheduled to announce its decision on Wednesday at 2:00 pm (1800 GMT) following a two-day meeting.
“It’s quite likely that the Fed will raise interest rates next week,” said Claudia Sahm, chief economist at investment firm New Century Advisors who previously worked at the Fed.
But “it’s not a done deal,” she cautioned in comments to AFP. “This is a difficult decision for them to make.”
An increase in interest rates would elevate borrowing costs across the US economy, serving as a deterrent to further investment and consumer spending.
Sahm cautioned that such a measure is “not a magic wand and it is a costly medicine.”
She noted that the Fed could choose to keep rates unchanged rather than administering that medicine, but it would be required to provide a clear explanation for its decision to the markets.
“If they surprise markets and they can’t explain why they’re surprising markets, then Wednesday afternoon will be pretty messy,” she said.
Since assuming his role, Warsh has altered the Fed’s communication strategy, favoring reduced transparency because he believes it prevents policymakers from being locked into paths that may require adjustment.
<a forward guidance," with analysts noting that it has created greater uncertainty regarding how financial markets calculate inflation and interest rate expectations.
Although Warsh previously advocated for lower interest rates due to anticipated productivity gains from AI, he has spent recent weeks emphasizing the Fed’s mandate to lower inflation.
“There’s always been this doubt about whether Kevin Warsh is going to be like his predecessors and do what’s right for the economy, even if it’s politically inconvenient,” said Wessel of Brookings.
“If he raises rates now and Trump goes ballistic, he will have established his credibility as an independent Fed chair for the rest of his term.”
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