Continued inflationary pressures are putting US Federal Reserve Chairman Kevin Warsh in increasing confrontation with President Donald Trump, with markets preparing to raise interest rates this week, in a move that may early test the new central bank head’s ability to balance resistance to inflation and maintaining the independence of monetary policy.
The Financial Times newspaper said that recent inflation indicators did not provide the Fed with the improvement that Warsh said it needed to avoid raising interest rates, which made keeping interest rates unchanged more difficult, at a time when investors’ bets on raising them during the bank’s meeting on Wednesday are increasing.
This puts Warsh in front of a precise equation; Raising interest rates for the first time in three years, and just weeks before the midterm congressional elections, may anger Trump, who has not hidden his desire to reduce borrowing costs, and even repeated on Sunday that the United States should enjoy “the lowest interest rate in the world.”
Kevin Hassett, director of the National Economic Council in the Trump administration, said that the president “certainly will not be very happy” if the matter ends up raising interest, but at the same time he stressed that the Fed’s independence requires that the bank stay away from elections.
On the other hand, economists and former central bank officials believe that the recent data makes raising interest in September more likely, not only because of inflation, but also to preserve the credibility of the central bank.
Roger Ferguson, former Vice President of the Federal Reserve, said that the data makes it “much more likely” that the bank will act this week, adding that all indicators are pushing towards September as the date for raising interest rates if Warsh and his colleagues want to maintain the bank’s credibility.
Inflation doesn't give Warsh room to maneuver
The confrontation comes at a time when US inflation remained high during most of 2026, after high fuel prices, resulting from the US war on Iran, began to spread to other sectors of the economy.
Inflationary pressures received a new impetus last week, with oil prices rising again due to Houthi attacks on energy facilities and infrastructure in Saudi Arabia, which led to Brent crude oil exceeding $100 per barrel and reaching its highest level since May. Diesel also exceeded $6 per gallon for the first time ever.
In his speech at the Jackson Hole symposium last month, Warsh warned that the path of prices had become “more worrying,” and said that monetary policy makers would have “work to do” if inflation did not decline soon.
But the inflation data released on Friday did not give him the improvement he was waiting for. Data from the US Bureau of Labor Statistics showed that annual consumer price inflation stabilized at 3.4 percent in August, unchanged from July.
The data led to a clear shift in the expectations of a number of the largest Wall Street banks, which moved from expecting to hold interest rates to preferring them to be raised. The odds of raising interest in the markets jumped from about 50 percent at the beginning of last week to nearly 90 percent (Friday).
Michael Feroli, chief US economist at JPMorgan, said that Warsh's repeated warnings about inflation could jeopardize the institution's credibility if they are not followed by actual action.
David Merkel, an economist at Goldman Sachs, also said that monetary policy makers will take into account the potential market reaction if they do not implement the interest rate hike, which the markets, based on the Fed’s recent messages, have become highly priced in.
Merkel added that Warsh's speech at Jackson Hole led markets to expect an interest rate hike if inflation data came in "less than ideal," noting that the recent consumer price data was not worrisome in the severe sense, but it was not ideal either.
Between independence and elections
The sensitivity of the decision increases due to its political timing. If the Federal Reserve raises interest rates on Wednesday, it will be about seven weeks before the midterm elections that will determine control of Congress during the second half of Trump’s term.
Trump had previously shown his impatience with Jerome Powell, Warsh's predecessor, because of what he saw as a slowdown in lowering interest rates, which he described in harsh terms.
However, Trump hinted that he may not hold Warsh personally responsible for raising rates, as he said that the Fed Chairman wants to “do the right thing” on interest rates, but he may face an open market committee that he describes as “political” and “hostile.”
Gregory Daco, chief economist at EY Parthenon, believes that the decision to postpone raising interest until after the midterm elections, or to raise it only to protect the bank’s credibility, should not be part of the discussion of monetary policy makers, even though the matter has become a main focus in market discussions.
Daco expects the Federal Reserve to raise interest rates after the majority of committee members are convinced that the pace of inflation slowdown is not fast enough.
It is likely that Warsh will benefit from the majority position within the committee, and lead the decision from behind, by voting in favor of raising the interest rate.
South Korean stocks fell in trading on Monday, affected by investors' concerns about the repercussions of artificial intelligence after sector officials called for slowing down the pace of developing models, while the won rose against the dollar and benchmark bond yields declined.
The KOSPI index fell 138.96 points, or 2.01 percent, to 6,770.95 points by 02:51 GMT.
Samsung Electronics shares fell 2.12 percent, while SK Hynix shares fell 4.19 percent, amid pressure on the shares of chip companies related to the artificial intelligence sector.
Dario Amodei, CEO of Anthropic, called on artificial intelligence companies to slow down the pace of evaluating models, as part of a three-step proposal aimed at giving companies more time to deal with the risks and challenges associated with developing the technology.
In a separate move to expand market activity, the Korea Stock Exchange began allowing trading after official market hours from 4 p.m. to 8 p.m. local time on Monday. The move comes after the launch of the alternative trading system “NexTrade” for extended trading in March 2025.
Shares of a number of other major companies declined, as the battery company “LG Energy Solutions” shares fell 1.25 percent, “Hyundai Motor” shares fell 2.75 percent, while “Kia” shares fell 1.90 percent.
The shares of the steel company “Posco Holdings” also fell by 2.54 percent, while the shares of the pharmaceutical company “Samsung Biologics” rose 1.20 percent.
Out of a total of 913 shares traded, 332 shares rose, while 539 shares declined.
Foreign investors recorded net stock sales of 2.2848 trillion won ($1.70 billion).
In the currency market, the won rose to 1,344.0 against the dollar on the local settlement platform, compared to 1,344.1 at the previous close, a marginal increase of 0.01 percent.
The KOSPI index has risen 60.67 percent since the beginning of the year, while the won has risen 7.1 percent against the dollar during the same period.
In debt markets, the most liquid three-year Korean Treasury bond yield rose 1.8 basis points to 4.041 percent, while the benchmark 10-year bond yield fell 4.7 basis points to 4.524 percent.
The dollar rose in Asian trading on Monday, while the yen maintained its gains near its highest level in seven months, as investors awaited interest rate decisions from the Federal Reserve and the Bank of Japan later this week, while rising oil prices and escalating tensions in the Gulf increased pressure on the markets.
Global markets are dealing with volatile price pressures resulting from the US-Israeli war on Iran that has been ongoing for six months, which pushed oil prices to exceed $100 per barrel and confused the path of interest rates, coinciding with a wave of selling in long-term bonds.
The European Central Bank kept interest rates unchanged last week, while warning of the possibility of the need for further hikes, thus paving the way for the Federal Reserve’s decision on Wednesday, and the widely expected hike by the Bank of Japan on Friday.
Traders raised their bets on the Federal Reserve raising interest rates after data released on Friday showed an acceleration in American consumer prices in August. Markets are currently pricing in an 86 percent chance of a rate hike this week, with another move expected later in the year, according to the CME Group's Fed Watch tool.
Shane Oliver, chief economist and head of investment strategy at AMP, said that delaying the Fed’s rate hike may be difficult, especially since its meeting in October precedes the US midterm elections, while waiting until December may be too late.
The euro fell 0.1 percent to $1.1585, while the British pound recorded $1.3516. The dollar index, which measures the performance of the US currency against six major currencies, rose 0.12 percent to 99.22 points, after recording limited declines over the past two weeks.
The two-year Treasury yield, which is more sensitive to interest rate expectations, fell slightly to 4.6148 percent, after rising 26 basis points last week.
Rising yields and shifting interest rate expectations have not yet led to clear support for the dollar, as major central banks in other economies are also preparing to raise interest rates, at a time when the prospects for US monetary policy are still uncertain.
Analysts at the Commonwealth Bank of Australia said that Federal Reserve Chairman Kevin Warsh will need to translate his tough tone into actual monetary policy measures, otherwise he may face additional risks in the bank’s efforts to control inflation.
They added that there is a limited possibility for the dollar to decline if the Federal Reserve raises interest rates, but during his press conference, Warsh reduced the possibility of implementing additional increases.
In the oil market, Brent crude futures rose 3 percent to $107.60 per barrel, after new Houthi attacks on Saudi Arabia and Iranian attacks on ships in the Gulf.
Yen faces Bank of Japan test
The yen fell 0.3 percent to 154.03 against the dollar, but remained close to the seven-month high of 152.89 yen recorded last week.
There are signs of a shift in investors' positions towards the Japanese currency, as speculators have begun to form net buying positions on the yen for the first time since February.
MUFG analysts said in a note that the 25 basis point rate hike has become largely priced in in the markets, adding that strengthening the yen further will require a signal from the Bank of Japan of its intention to maintain a faster pace of rate hikes.
TD Securities said that the lack of a rate hike at the Bank of Japan meeting may push the dollar against the yen to rise again towards levels ranging between 157 and 160 yen, if the bank focuses on the possibility of raising rates in the October or December meetings.
The yen has risen by about 4 percent since the beginning of September, supported by expectations that the Bank of Japan will accelerate the pace of raising interest, in addition to indications that local investors may increase their holdings of yen-denominated assets.
James Adley, fixed income portfolio manager at Marlboro, said that not raising interest rates would be a “catastrophic mistake,” stressing the importance of the bank sending strong and clear messages about the course of monetary policy.
