The Federal Reserve appears ready to do something it hasn’t done in three years: raise interest rates. And the timing couldn’t be more politically combustible.
With the September 15-16 FOMC meeting approaching, markets are pricing in an 85-90% probability that the Fed will increase the federal funds rate by 25 basis points from its current 3.50%-3.75% range. The catalyst is straightforward: inflation is running hot at 3.4% year-over-year, well above the Fed’s 2% target, and showing no signs of cooling down on its own.
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The numbers behind the hike
August’s CPI report delivered the kind of print that makes central bankers reach for the rate lever. The headline figure came in at 3.4% annually, while core CPI, which strips out food and energy, posted a 0.3% month-over-month increase. That beat expectations of 0.2%, the kind of upside surprise that nobody at the Fed wants to see.
Core CPI on an annual basis hit 2.4%, which might sound manageable until you consider that the Fed has been holding rates steady throughout 2026 waiting for inflation to come down voluntarily. It hasn’t cooperated.
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The internal dynamics at the Fed tell the story of a central bank that has been building toward this moment. At the July meeting, the Fed held rates on a 3-9 vote, meaning three officials dissented in favor of hiking immediately. The June dot plot was even more revealing: nine officials signaled support for rate increases.
Chair Kevin Warsh, appointed by President Trump, has taken a notably hawkish posture on inflation control. In a twist that probably wasn’t part of Trump’s original plan when he selected Warsh, the chair appears focused on price stability over political convenience.
Trump wants rates at 1%. The Fed disagrees.
President Trump has publicly called for interest rates to be slashed to 1% or lower, a level that would represent a dramatic easing of monetary conditions. He has gone further, threatening to impose trade restrictions against countries with trade deficits if rates aren’t brought down.
The gap between where Trump wants rates and where the Fed is likely to move them is enormous. The president is calling for cuts to 1%. The Fed is about to hike from 3.50%-3.75% to 3.75%-4.00%.
What a rate hike means for markets
If the Fed follows through, it would mark the first rate increase since 2023, effectively ending the era of expectations that the next move would always be a cut.
Given that nine FOMC officials already signaled support for higher rates in the June dot plot, the market should probably prepare for a sustained tightening cycle rather than a one-off adjustment.
The September meeting will also be closely watched for forward guidance. Traders will parse every word of the post-meeting statement and Warsh’s press conference for signals about the pace and magnitude of future adjustments. A single 25 basis point hike with dovish language would be received very differently than a hike accompanied by projections for additional tightening through year-end.
Trump’s willingness to publicly pressure the Fed and link trade policy to interest rate decisions introduces a variable that markets haven’t had to price in at this intensity before.
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