Warsh Faces Independence Test as September Rate Hike Odds Top 85%

The odds of a September rate hike have climbed above 85% after the U.S. inflation pressures came in stronger than expected, setting up a potential clash between Federal Reserve Chair Kevin Warsh and President Donald Trump.

Trump has repeatedly urged the Fed to cut rates, warning that he could escalate the trade war if monetary policy is not eased. However, Wall Street, the rate-futures market, TD Bank, and JPMorgan Chase are all leaning toward a benchmark rate increase at this FOMC meeting.

Bloomberg Economics said investors want and expect an FOMC rate increase, warning that a failure to hike could damage the confidence of market participants. With recent inflation data coming in stronger than expected, questions are being raised about whether Warsh's leadership inside the central bank could come under pressure if he tries to block an increase.

Morris Obstfeld, a senior fellow at the Peterson Institute for International Economics, said the Fed is trapped in a dilemma: it can either risk the president's anger or lose credibility with markets and stoke more serious inflation later. He added that Warsh is unlikely to want to be remembered as the chair who yielded to administration pressure when the Fed's mandate was on the line.