US Federal Reserve Faces Crucial Test as Inflation Remains High

The US Federal Reserve is set to make a crucial decision on interest rates this week as it tackles persistently high inflation. The central bank's policymakers are expected to raise rates by 25 basis points to combat inflation, which has remained steady at 3.4 percent in August.

Market expectations of a rate hike have surged to over 85 percent according to CME's FedWatch tool, and analysts say central bank chief Kevin Warsh's credibility is on the line. The Fed has held rates steady since January, choosing to wait and gauge the effects of energy price shocks and tariffs.

Warsh was appointed by President Donald Trump, who has launched unprecedented attacks on the central bank's independence, demanding lower rates to spur economic activity. Analysts say this is Warsh's first real test as Fed chair: will he raise rates to combat inflation or hold steady in line with what the White House prefers?

David Wessel of Brookings Institution said, 'This is the test. This is what comes with that job, and now he has to decide how to handle it.' Claudia Sahm, chief economist at investment firm New Century Advisors, warned that raising interest rates would increase borrowing costs across the board for the US economy.