Fed Officials Teeter on Interest Rate Hike as Inflation Report Looms

Federal Reserve officials are watching Friday's consumer inflation report closely to determine whether interest rates should be raised next week. The decision is crucial as Fed officials have been divided over where rates should go, with some arguing that they need to be higher to bring inflation down to the 2% target.

Economists expect core prices, which exclude volatile food and energy items, rose 0.2% in August, a figure that could sway the decision. The gap between a number that forces the Fed's hand and one that lets it wait may be as slim as a tenth of a percentage point.

Fed Chairman Kevin Warsh has been moving toward raising rates, with his speech at the Fed's Jackson Hole conference last month indicating he sees little evidence that borrowing conditions are restraining the economy. His comments have convinced investors to price in an increase, now putting the odds at around 60%, up from 35% before the speech.

However, some officials argue that the risks ahead matter more than the last two or three readings, with a war keeping energy prices elevated and new tariffs straining supply. A hot number on Friday would say the opposite, that the summer's improvement didn't stick, and leave Warsh little room to hold rates steady.