Pressure from the White House can't stop the hawks from turning! The Fed's interest rate hike is on the verge, and the relationship between Walsh and Trump is facing a major test

The Zhitong Finance App notes that the market expects the Federal Reserve to raise interest rates on Wednesday for the first time since 2023 — because policymakers' confidence in “inflation can be fully cooled without at least one push from the central bank” is being lost.

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

Officials have kept the benchmark interest rate unchanged in the 3.5% to 3.75% range since December of last year. At the time, most policymakers believed that progress in reducing inflation was being held back by temporary factors.

Since this year, doubts within the Federal Reserve about this position have been steadily heating up, and a recent hot inflation report seems to have broken the balance, turning the balance towards at least one short-term rate hike. Investors on Tuesday believed that the probability of a 25 basis point rate hike this week was over 90%, and they have taken into account that there will be another rate hike before the end of the year.

“At some point, they have to raise interest rates,” said Sebnem Kalemli-Ozcan, professor of economics at Brown University. “And in reality, the longer this matter is delayed, the more stubborn the inflation will become and the bigger the problem.”

The Federal Reserve will make a statement after the press conference in Washington at 2 p.m. on Wednesday, and also announce updated economic forecasts and interest rate forecasts. Walsh is scheduled to hold a post-conference press conference 30 minutes later.

White House concerns

The rate hike could attract fresh criticism from the White House. On Sunday, Trump also repeated his argument that the US should have the lowest borrowing costs in the world.

Since Trump appointed Walsh to succeed Jerome Powell as chairman, the president has substantially calmed down his attacks on the Federal Reserve. He even hinted that Walsh was being pressured by other Federal Reserve officials to raise interest rates, accusing these officials of being “very politicized.”

However, in a speech at the end of August, Walsh made it clear that there has been no substantial improvement in potential price pressure. If the Fed does not obtain new guarantees and confirms that inflation is on the path to the central bank's 2% target, then the Fed “still has work to do.”

Two weeks later, data showed that core inflation in August — excluding food and energy — rose more than expected. Although this increase was largely driven by a record surge in wireless phone services, many analysts said the Federal Reserve was unable to ignore the report after not reaching the 2% target for more than five consecutive years.

press conference

When Walsh answers questions from reporters, his statement will be closely watched. In his appearance after the July 29th meeting, he failed to give a clear explanation of the Federal Reserve's decision to keep interest rates unchanged, and hardly revealed his views on the economy. This sparked a jump in long-term treasury yields, as well as a wave of criticism from traders and economists.

However, Walsh's speech in Jackson Hole, Wyoming last month seemed to allay investors' concerns. A rate hike on Wednesday may further repair any remaining damage.

Journalists are likely to ask the chairman again to explain the Commission's decision and try to catch any hint — whether this rate hike could mark the beginning of a cycle of rate hikes. Although he is unlikely to give a clear signal about the future path of interest rates, he may once again discourage investors if he continues to refuse to share his views on the current state of the economy.

There may be a negative vote

Since this year, concerns within the Federal Reserve have continued to accumulate: a series of seemingly temporary factors, including tariffs and the war with Iran, may solidify high inflation into public expectations.

At the July meeting of the Federal Reserve, three officials voted against and supported interest rate hikes. If interest rates are raised at this meeting, it may also be supported by several colleagues — these people said before the August inflation report was released that they needed to see improved price data to keep the policy unchanged.

However, decisions are not necessarily adopted unanimously. Governor Christopher Waller's interpretation of inflation sent mixed signals, while New York Federal Reserve Chairman John Williams said earlier this month that there is still evidence that de-inflation is underway. Many economists also predict that Michelle Bauman, the vice chairman responsible for regulation, who is seen as being highly consistent with the White House's position, may vote against and support keeping interest rates unchanged.

Policymakers will also submit updated economic and interest rate forecasts this week. In a recent survey, economists expect their outlook on unemployment and inflation to remain largely unchanged. Interest rate forecasts should reveal how many officials expect more rate hikes this year.

However, these predictions probably did not include Walsh's contribution — when officials last submitted their predictions in June, he was not involved.