Fed Raises Rates Under Warsh, Signals More Tightening Despite Trump Pressure

Kevin Warsh took the helm of the Federal Reserve in late May with an expectation from the Trump administration that he would cut interest rates. On Wednesday, he did the opposite. The Fed raised its benchmark overnight rate by a quarter percentage point to a range of 3.75% to 4.00%, and signaled through new economic projections that more increases were coming. Sixteen of the eighteen policymakers on the committee expect at least one additional quarter-point hike before the year ends. Only two see rates holding steady from here. Warsh did not submit his own rate projection, maintaining a pattern from his early months in office.

The rate increase amounts to a public acknowledgment that the Trump administration has not succeeded in controlling inflation despite its stated commitment to lowering prices. Three forces have kept price pressures stubborn: the global tariffs the administration imposed, an energy shock following the start of the U.S.-Israeli war with Iran, and the capital spending surge tied to the artificial intelligence boom. Inflation, measured by the Personal Consumption Expenditures Price Index, now sits at 3.7%—higher than the 3.6% the Fed projected just three months earlier in June. The central bank no longer expects inflation to return to its 2% target until 2029, a full year later than previously forecast.

At his press conference, Warsh framed the decision in technical terms. "Inflation remains elevated," he said. "Today's policy action will support a timelier return to the committee's 2% goal." He noted that financial conditions did not feel restrictive enough to justify holding rates steady, and that the committee had voted unanimously to remove what he called "a dose of accommodation." The language was careful and measured, but the message was unmistakable: the Fed would continue tightening monetary policy regardless of political pressure.

The decision came less than two months before midterm elections that will determine whether Trump's Republicans keep control of Congress. The timing is uncomfortable for the party. Gasoline prices are roughly a third higher than they were a year ago. Mortgage rates on a 30-year fixed loan are approaching 7%, up steadily throughout the year. Voters angry about these costs will head to the polls in an environment where the Fed is actively raising borrowing costs further, not easing them.

Financial markets absorbed the news with relative calm. The dollar rose against the euro. The S&P 500 climbed 0.3% and the Nasdaq Composite gained 0.7%. The 10-year Treasury yield, which had spiked above 5% on Monday, settled at 4.958%, essentially flat from before the announcement. Traders adjusted their expectations for the Fed's next meeting in late October, raising the probability of another rate hike to 56.5% from 54%.

The decision also settles a question that has lingered since Warsh's appointment: whether he would defer to Trump on monetary policy. Some observers wondered if the new Fed chair, selected by a president who has long criticized high interest rates, might hold back on tightening. Wednesday's unanimous vote and forward guidance dispel that concern. The Fed's statement dropped a previous reference to "supply shocks" as a driver of inflation, signaling that policymakers—including Warsh—now see price pressures as too broad and persistent to blame on temporary disruptions. Economic growth was marked up slightly to 2.3% from 2.2%, and the unemployment rate is expected to end the year at 4.1%, down from the 4.3% projected in June. But none of this softness in the labor market or strength in growth has convinced the Fed to pause its campaign against inflation. Warsh has pledged to bring inflation down "clearly and at sufficient speed" by raising rates as needed, and Wednesday's action shows he intends to keep that promise.