Warsh Expected to Side with Markets over Trump on Interest Rates

Federal Reserve Chair Kevin Warsh is facing pressure from President Donald Trump to keep interest rates low, but economists expect him to side with financial markets and raise them instead.

The Fed's key rate has been at 3.75% for over three years, and investors are expecting a quarter-point hike this week, which would push it to about 4%. This comes after Warsh delivered a speech last month warning that inflation remains too far above the Fed's 2% target.

Warsh has been in a tough spot since becoming chair in May, as he initially said the Fed could lower interest rates but now faces opposition from Trump. The President wants the Fed to cut rates or leave them unchanged, which would be seen as giving in to political pressure and undermine the central bank's credibility.

Economists believe that a rate hike now will ultimately help restore faith in the 2% inflation target and reduce the premium on long-term interest rates. If the Fed doesn't hike its key rate, it risks being seen as failing to combat high inflation, which could lead to higher mortgage rates, business borrowing costs, and interest on the debt.