Fed Defies Trump, Expected to Raise Interest Rates Despite Midterm Elections

The Federal Reserve is expected to raise its benchmark interest rate for the first time in three years on Wednesday, defying President Donald Trump's demands for a cut. The move aims to combat stubbornly high inflation, which has been fueled by surging oil and gas prices following the recent flare-up in Iran. Fed Chair Kevin Warsh has argued that the central bank has not yet achieved its goal of putting inflation in check.

Warsh's decision is seen as a bold move, especially given Trump's repeated criticism of the Fed's independence. However, most analysts and economists expect the rate hike to go ahead, with traders giving it a 90% chance based on futures prices. This follows Friday's inflation report, which showed that prices remain high and core inflation picked up in August.

The rate increase is likely to be a quarter-point rise, taking the Fed's benchmark rate to around 3.6%. However, there are concerns about how effective this will be in reducing inflation when much of it stems from higher oil prices, something the Fed can't control. Some members of the Fed's interest-rate setting committee may still expect inflation to fade over time and may not feel a rate hike is necessary.

Warsh has been clear that he sees recent inflation reports as evidence that underlying trends have not improved. He stated in his Jackson Hole remarks that if such improvement wasn't seen soon, 'we have work to do.' By boosting Fed credibility, the rate hike could hold down longer-term interest rates that consumers pay for things like mortgages and auto loans.