Warsh's Rate Hike Gamble: Will He Follow Through or Fold?

Kevin Warsh, the U.S. Federal Reserve Chairman, is facing intense scrutiny after opening the door to higher interest rates last week. The decision will be crucial in determining his credibility as a policymaker independent of President Donald Trump's wishes.

The Fed chief's speech at the Kansas City Fed's annual Jackson Hole conference in Wyoming on Friday went further than expected in agreeing that higher rates may be needed to curb inflation stuck above the central bank's 2% target. Analysts credit Warsh for clarifying that the Fed would use interest rates as the main weapon against rising prices.

Fed policymakers will meet on September 15-16, and investors now see a roughly two-to-one chance the central bank will approve a quarter-percentage-point hike in the overnight policy rate. A rate hike later this month could be a powerful signal from the U.S. central bank's policy committee that Trump has failed to contain inflation.

Robert Tetlow, a former senior policy adviser at the Fed, notes that Warsh faces problems if the data for August do not line up well with the decision the committee makes in September. With higher rates on the table, Warsh will have to either follow through this month with a rate increase weeks before the U.S. midterm elections or risk being branded as inconsistent.