Markets are pricing in an approximately 90% chance that the US Federal Reserve raises interest rates at its next policy meeting, the first among three scheduled sessions under new chair Kevin Warsh. A widely expected 25-basis-point increase would place the funds rate at 3.75% to 4.00%.
Inflation data released on Friday reinforced the case for action. The annual headline rate held at 3.4% in August, well above the Fed's 2% target. Commerzbank economist Christoph Balz said the central bank must act now. "It has already signaled it could raise rates if the inflation trend does not ease quickly. Now it basically has to move," he said. He expects a 0.25-percentage-point hike on Wednesday.
Driven chiefly by rising energy costs, the inflation trajectory looks far from settling. Energy prices climbed sharply again in September, and a reversal appears unlikely given the recent escalation in the Middle East. Meanwhile, the US economy remains resilient and the August labor market came in stronger than expected — both factors that support a further tightening move.
Warsh opened the door to a rate increase at last month's Jackson Hole conference, saying the Fed would act if inflation does not progress more rapidly toward its target. On the bond market side, warsh and his colleagues are likely watching the steep rise in Treasury yields. Ten-year note yields recently pushed past 5%, the highest level since 2007, fueled not only by inflation but also by the rapidly growing US government debt load and heavy financing demand from AI-sector companies.
Compounding the challenge is political pressure from President Donald Trump, who continues to call for rate cuts — a stance that diverges from most economists. Trump recently reaffirmed a threat of trade stoppages against countries if the central bank does not loosen policy. He had appointed Warsh after predecessor Jerome Powell refused to cut rates.
"The White House is still demanding lower rates while new activity in the Treasury market makes fiscal-monetary interaction even more complex," said Jenny Zeng, investment strategist at Allianz Global Investors. "After years of missing its inflation target, the Fed's credibility is on the line. Markets will watch whether Chairman Warsh backs up his recent comments with action."
