Fed On Collision Path With Trump As Rate Hikes Loom On Horizon

President Donald Trump is demanding that his new Federal Reserve chief slash interest rates. Wall Street investors are increasingly — and overwhelmingly — taking the opposite bet.

The latest flare-up of the fighting in Iran, along with the imposition of new global tariffs, the breakneck investment in data centers, and resilient consumer spending, are fueling a conviction in the markets and within the Fed that the central bank will need to stifle prices.

While Chair Kevin Warsh, who took over the Fed in late May, will likely stave off an increase by the rate-setting committee when it meets on Wednesday, he might not be able to hold his colleagues off for too much longer if inflation doesn’t sustainably improve. That’s a dramatic turnabout from earlier this year, when the strong consensus was that borrowing costs would come down and boost the economy.

“I don’t think they can go past September if the data keeps coming in like it is,” said Diane Swonk, chief economist at KPMG, a major consultancy and one of the Big Four global accounting firms.

Any rate hikes in the run-up to the midterm elections would come at a precarious time for the Republicans, a dynamic the Fed usually tries to avoid, with polls showing Americans deeply dissatisfied with Trump’s economy. Higher borrowing costs would enrage the president, who greeted the end of Jerome Powell’s chairship with hopes that he would finally get the lower rates he has been clamoring for — a call he repeated earlier this week.

But if the Fed does increase rates this year, his wrath looks likely to turn on other central bankers, rather than his appointee Warsh, at least initially. Trump has picked three of the Fed’s seven-member board of governors.

“Kevin’s fantastic, but he’s got a board, and the board members are very political,” Trump told reporters on Air Force One on Monday. “He wants to do the right thing. I know what he wants to do. But you need the consent of some people that have perhaps bad intentions. Rates should be lowered.”

Powell, whom Trump tapped as Fed chair in 2018, was initially named to the central bank by President Barack Obama. He remains on the Fed board even after stepping down as chair in May, a move he said was intended to help preserve the institution’s independence. He has not spoken about monetary policy since leaving the Fed’s top job, but several of his colleagues have suggested the central bank might need to raise rates soon.

One of Trump’s key economic surrogates, White House official Kevin Hassett, has said it would be a “mistake” to lift rates.

But inflation has been above the Fed’s 2 percent target since 2021, and in May, the consumer price index logged its biggest 12-month increase since 2023. The Iran war, which has sharply driven up energy costs, is the wild card, with repeated efforts to resolve the conflict falling short. The danger is that those prices feed higher prices for other goods and services as well.

“I do expect we’ll see lower energy prices over the next couple of months,” particularly as the administration eyes the midterm elections and tries to facilitate more movement of oil through the Strait of Hormuz, said Gus Faucher, chief economist at PNC Financial Services Group. “But they’re still up from where they were before the hostilities with Iran started.”

One risk for Warsh and his fellow central bankers is that markets could take a decision to keep rates steady on Wednesday as a sign that they are hesitant to rein in inflation. That could cause investors to push up longer-term rates, thereby raising borrowing costs anyway.

Joe Lavorgna, a former senior aide to Treasury Secretary Scott Bessent and now chief economist at SMBC Americas, said there are other risks to not acting right away. For example, inflation could come in hot before the Fed’s meetings in September or October, when rate increases would be even more awkward politically.

“Does the Fed want to hike rates then?” he said. “I guess if they have to, they will. But that’s not going to play well. And then if they say, ‘Well, it's too close to the midterms, let's wait.’ And they wait till December. Does it need to get worse?”

The White House won’t be pleased if the Fed moves this week, he said.

“But if you’re the Fed ... waiting is not going to help you longer term,” Lavorgna said. “Once [inflation] does become embedded in the system, you generally have to raise rates a lot more to really dampen the economy.”

It’s possible the data for the rest of the year could paint a more benign picture that allows the central bank to simply keep rates steady. If energy costs ease, wage growth continues to slow, and tariff costs put a drag on companies, all of that could make it harder for prices to keep rising.

But Trump’s dream of significantly lower rates keeps getting further away.

“Our forecast, as of July, is no rate hikes this year,” Faucher said. “But if I’m wrong, we’re much more likely to see rate hikes than rate cuts in 2026.”

Sam Sutton contributed to this report.