The Federal Reserve, under the leadership of Kevin Warsh, is in a position where financial markets expect an increase in interest rates, while Donald Trump, the President of the United States, is calling for a reduction in borrowing costs or the maintenance of current rates. As the Federal Reserve's decision approaches on Wednesday, economists predict that Warsh and other policymakers will pay attention to market consensus.
Challenges Facing the Federal Reserve
Warsh warned at the Jackson Hole conference in early August that inflation rates remain significantly above the Federal Reserve's 2% target. Expectations for an interest rate hike have strengthened following the release of the latest inflation figures, with financial markets estimating a 90% chance of a 0.25% increase.
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If this increase occurs, the Federal Reserve's target range will change from 3.5%-3.75% to 3.75%-4%. This decision could test the credibility of the Federal Reserve. Warsh faced a similar challenge early in his tenure and left the key rate unchanged at the July meeting. His subsequent press conference also lacked sufficient clarity for investors.
Economic and Political Implications
An increase in interest rates could help lower long-term rates in the future, but it could also fuel criticisms that the Federal Reserve is under pressure from the White House. Christian Forbes, an economics professor at the Massachusetts Institute of Technology, has pointed out that those who act under political pressures are not well remembered in history.
Moreover, the increase in interest rates will impact mortgage and corporate loan costs. In the week ending September 10, the average 30-year mortgage rate reached 6.76%. If the Federal Reserve keeps rates unchanged again, we are likely to see a similar negative reaction from the markets.
Although the Federal Reserve is expected to raise rates on Wednesday, it is still unclear whether further increases are on the way. Generally, central banks rarely change interest rates just once and usually follow a series of increases or decreases. Therefore, investors will pay special attention to the Federal Reserve's economic forecasts.
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