Fed Faced with High Inflation Dilemma as Rate Hike Looms

The US Federal Reserve will meet this week to discuss interest rates and tackle high inflation. Analysts expect policymakers to raise rates to combat persistently high inflation, which has remained steady at 3.4 percent for two consecutive months.

This is a key test for central bank chief Kevin Warsh, who was appointed by President Donald Trump and has been criticized for his handling of monetary policy. Warsh has hinted that if inflation does not slow down, the Fed will have to raise rates.

Market expectations of a 25-basis-point rate hike on Wednesday surged in the wake of new data, with the probability at more than 85 percent according to CME's FedWatch tool. The last time the Fed raised rates was three years ago when it was fighting surging inflation caused by the pandemic.

Trump has railed against the Fed over interest rates since taking office, launching unprecedented attacks on the central bank's independence and demanding lower rates to spur economic activity. Warsh has advocated for less transparency into the Fed's decision-making process, which has introduced uncertainty into how financial markets price in inflation and interest rate expectations.