The Federal Reserve is widely expected to raise its short-term interest rate by a quarter point on Wednesday, its first increase in three years, as it confronts persistently high inflation. The potential move from the current rate of about 3.6% would conflict with President Donald Trump’s demand for a rate cut and would come seven weeks before the midterm elections.
An increase is not guaranteed because Fed Chair Kevin Warsh does not provide the signals about forthcoming decisions that his predecessors did. Most analysts and economists nevertheless expect a hike after Warsh said at the Fed’s annual conference in Jackson Hole, Wyoming, two weeks ago that the central bank had not yet achieved its goal of bringing inflation under control.
The expected decision would mark a sharp reversal from March, when the Fed forecast that it would cut its rate once this year. The renewed Iran war has driven substantial increases in oil and gasoline prices, making inflation likely to remain above the Fed’s 2% target for longer. Surging investment in artificial intelligence data centers has also accelerated inflation and contributed to higher longer-term interest rates, although leading companies are now discussing slowing the technology’s development.
Kristin Forbes, an economist at MIT’s Sloan School, said consumers and companies have become more responsive to price pressures after several years of elevated inflation. “Given what everyone has been through in the last few years of high inflation, consumers are more sensitive, companies are more sensitive, they raise prices faster ... The risks are much more on more persistent inflation than it falling quickly.”
Interest rates have become politically sensitive as high prices and affordability take prominent roles in the midterm elections. Trump said Sunday that “the United States is so strong we should be paying the lowest interest rate in the world.” His top economic adviser, Kevin Hassett, told CNN that Trump “100% respects the independence of Kevin Warsh,” but Hassett also told Fox News that he would be wary of an increase so close to the elections and argued that an independent Fed should stay out of their way.