White House Pressure Fails to Prevent Hawkish Shift! Federal Reserve Rate Hike Looms, Waller-Trump Relationship Faces Major Test

According to Zhitong Finance APP, the market expects the Federal Reserve to raise interest rates on Wednesday for the first time since 2023—as policymakers' confidence that "inflation will ease sufficiently without at least a little push from the central bank" is fading.

This is likely to strain the relationship between Chairman Kevin Walsh and U.S. President Trump.

Since last December, officials have kept the benchmark interest rate unchanged in the range of 3.5% to 3.75%, with most policymakers at the time believing that temporary factors were hindering progress on lowering inflation.

Since the beginning of this year, doubts about this stance have steadily increased within the Fed, and a recent hot inflation report seems to have tipped the scales toward at least a short-term rate hike. Investors on Tuesday priced in over a 90% probability of a 25 basis point hike this week and also anticipated another hike by year-end.

"At some point, they have to raise rates," said Brown University economics professor Sebnem Kalemli-Ozcan. "And in fact, the longer this is delayed, the more stubborn inflation will become, and the bigger the problem will be."

The Fed will release a statement at 2 p.m. Wednesday in Washington following its meeting, along with updated economic and interest rate forecasts. Walsh is scheduled to hold a post-meeting press conference 30 minutes later.

White House Concerns

A rate hike could invite new criticism from the White House. Just on Sunday, Trump reiterated his argument that the U.S. should have the world's lowest borrowing costs.

Since Trump appointed Walsh to succeed Jerome Powell as chairman, the President has largely scaled back his attacks on the Federal Reserve. He even suggested that Walsh is under pressure from other Fed officials to raise rates, accusing these officials of being "very politicized."

However, in a speech at the end of August, Walsh clearly stated that underlying price pressures have not markedly improved. If the Fed does not gain new assurances that inflation is on track toward the central bank’s 2% target, it "still has work to do."

Two weeks later, data showed core inflation in August—excluding food and energy—rose more than expected. Although much of this increase was driven by a record surge in wireless telephone services, many analysts said the Fed could not ignore this report after more than five years of missing the 2% target.

Press Conference

Walsh's responses to reporters will be closely watched. In his July 29 post-meeting appearance, he failed to provide a clear explanation for the Fed’s decision to hold rates steady and revealed little about his views on the economy. This sparked a surge in long-term Treasury yields and drew a wave of criticism from traders and economists.

However, Walsh’s speech last month in Jackson Hole, Wyoming seemed to allay investors’ concerns. If rates are raised on Wednesday, it may further repair any lingering damage.

Reporters will likely once again press the chairman to explain the committee’s decision and seek any hints as to whether this rate hike could signal the start of a tightening cycle. Although he is unlikely to give a clear signal about the future path of rates, should he continue to withhold his views on the current economic situation, investors may again feel frustrated.

Possible Dissenting Votes

Concerns within the Fed have mounted throughout the year: a series of seemingly temporary factors, including tariffs and the Iran war, could entrench high inflation in the public's expectations.

At the Fed's July meeting, three officials cast dissenting votes in support of a rate hike. If rates are hiked at this meeting, it could also win the backing of several colleagues—who stated before August’s inflation report was released that they needed to see improvement in price data in order to keep policy unchanged.

However, the decision may not be unanimous. Governor Christopher Waller has issued mixed signals on his interpretation of inflation, and New York Fed President John Williams stated earlier this month that there is still evidence for ongoing disinflation. Several economists also predict that Vice Chair for Supervision Michelle Bowman—viewed as closely aligned with the White House stance—may dissent and support keeping rates unchanged.

Policymakers will also submit updated economic and interest rate forecasts this week. In a recent survey, economists expect their outlooks for unemployment and inflation to remain largely unchanged. The rate projections should reveal how many officials expect further hikes this year.

However, these forecasts will likely not include Walsh’s contribution—as he did not participate when officials last submitted projections in June.