Fed September meeting: Hike rates to fight inflation or heed Trump’s call for cuts — what should Kevin Warsh do?

Federal Reserve Chair Kevin Warsh faces his first major test next week as markets bet on a rate hike on September 16, even as President Donald Trump pressures the central bank to cut borrowing costs.

The dilemma has become sharper after back-to-back inflation readings pointed to renewed price pressures. The Consumer Price Index increased 0.4% last month after edging up 0.1% in July, the Labor Department's Bureau of Labor Statistics said. In the 12 months through August, consumer inflation advanced 3.4%.

The data have pushed markets further towards a rate hike. Soon after the CPI data was published on Friday, financial markets priced in a roughly 91% chance of a rate hike next week, up from about 72% on Thursday, according to CME's FedWatch tool, as reported by Reuters.

‘It is time to put up, or shut up’

For Warsh, the decision he takes is not only about market expectations but also about his own credibility and the Fed’s independence.

At Jackson Hole last month, Warsh clearly articulated that policymakers should be confident that underlying inflation was moving towards the central bank’s 2% target; otherwise, they had “work to do.”

Friday’s inflation data makes that promise harder to ignore.

“For the Fed, it is time to put up, or shut up,” wrote Inflation Insights founder Omair Sharif. "You cannot give a speech like you did at Jackson Hole and not support a rate hike at the next meeting. You will either have to back up those words or end up as the boy who cried wolf."

On the other hand, the pressure from the White House has been equally direct. Trump has repeatedly demanded lower interest rates, arguing that borrowing costs should fall. Last week, he even posted on social media: “LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT.”

That puts Warsh in an uncomfortable position. Cutting rates amid sticky inflation data will undermine the Fed’s credibility; at the same time, hiking rates could intensify Trump’s criticism against the central bank.

What should Warsh do?

For Warsh, the clearest option may be to prioritise the inflation mandate, deliver a measured 25-basis-point hike and signal that future moves will depend on incoming data, experts said.

That would risk another confrontation with Trump. But doing nothing after warning that the Fed may need to act could carry a different risk, that is, weakening the central bank’s credibility.

It is a major test for Warsh, given that its concerns extend not only to where interest rates go next but also to showing that the Fed's monetary policy is guided by data, not politics.