Walsh Faces Credibility Test as Fed's Rate Hike Probability Reaches 86.5%

Market expectations of a 25-basis-point rate hike by the Federal Reserve have surged to 86.5%, as August CPI rose 3.4% year-over-year and core CPI rebounded 0.3% month-over-month.

The sharp increase in probability is largely driven by energy prices, which rose 2.1% month-over-month in August, with gasoline prices surging 3.9%, a single factor accounting for over one-third of the month's overall CPI increase.

Federal Reserve Chairman Kevin Walsh faces a credibility test amid pressure from Trump and the fight against inflation. Walsh was sworn in as Chair on May 22, 2026, following his nomination by Trump, and has since demonstrated a hawkish shift in policy stance. At the Jackson Hole Global Central Bank Symposium on August 28, he stated that U.S. core inflation has not shown meaningful improvement, and that policymakers still have 'work to do' if future data fails to demonstrate that inflation is moving back toward the 2% target.

The challenge facing Walsh is not only a technical judgment on monetary policy but also a microcosm of the power struggle between the White House and the Federal Reserve. Trump's attacks on the independence of the Federal Reserve have escalated since his second term, with the U.S. Department of Justice serving a subpoena to the Federal Reserve in January 2026.