Traders are assigning an 86.9% probability to a Federal Reserve rate hike at next week's meeting, running counter to expectations set by President Trump, who campaigned for lower interest rates and selected Kevin Warsh as Fed Chair to deliver them.
Warsh took office on May 22 after Trump spent months criticizing former Fed Chair Jerome Powell for moving too slowly on rate cuts. Powell's committee did cut rates three times in late 2025, with the final cut on December 10. However, Warsh has not cut rates since his appointment, with his two meetings in June and July both ending with no change.
The Case for a Rate Hike
Recent economic data has shifted the discussion toward rate increases. Core prices, which exclude food and fuel, rose 0.3% in August against economist expectations of 0.2%. Gasoline prices jumped 3.9% in a single month. Fed Governor Christopher Waller had previously stated that a strong inflation reading would put a rate hike on the table.
Heather Long, chief economist at Navy Federal Credit Union, argues that a rate hike is the right call given growing risks that inflation remains elevated. She suggests that cooling prices through higher rates could benefit lower-income Americans.
In July, three Fed officials voted to raise rates, and market pricing now favors their position. UBS currently expects two rate increases this year.
Arguments Against a Hike
Critics contend that a rate increase would conflict with the Fed's dual mandate of price stability and maximum employment. The labor market added 162,000 jobs in August, with unemployment holding steady at 4.1% and participation rising. Daniel Lacalle, chief economist at Tressis, argues that energy-driven price increases, rather than demand overheating, should not trigger rate hikes that could harm job creation and investment.
The White House has offered its own perspective on inflation data. Kevin Hassett, who runs the National Economic Council, points to core inflation at 1.6% over a three-month window, a shorter timeframe than the Fed typically uses.
Warsh indicated at Jackson Hole that his messaging was intentional regarding rate policy, though his ultimate decision comes Wednesday. Trump has stated he wants rates near 1%, and analyst commentary suggests his preferences and midterm considerations may be the only factors restraining the Fed.
Bitcoin and gold both declined on the inflation data but recovered almost immediately.
