Trump wants lower rates. His new Fed chairman is poised to raise them

The Federal Reserve finds itself in a confusing economic moment, but one thing has become clear: Interest rates are moving higher, likely starting Wednesday. That's an awkward reality for Kevin Warsh, the Fed chairman handpicked by President Donald Trump to lower rates.

If the Fed hikes its key interest rate as Wall Street expects, it would effectively put him at odds with the president, who has continued to demand lower borrowing costs , even as inflation remains stubbornly above the Fed's 2% target.

Fed officials are expected to begin what could be a series of rate hikes designed to slow the US economy and put inflation back on track. The ongoing war in the Middle East has pushed up energy prices and now threatens to make inflation more persistent. If expectations bear out, the Fed's decision would mark the first rate increase since July 2023.

Wall Street expects the Fed to hike rates twice by year's end — this month and again in December. While that probably would not be enough to cause serious economic damage, the larger question is what happens if inflation doesn't come down.

So, the Fed is mulling how many rate hikes may be necessary, which raises the other question of how well American consumers and businesses can endure those higher rates, especially in the face of mounting consumer debt, weaker spending and longer spells of unemployment. Raising rates could weaken an economy that is already showing signs of strain.

"The odds of a serious Fed policy mistake are uncomfortably high and rising," Mark Zandi, chief economist at Moody's, wrote on social media. "If the Fed tightens to bring inflation down faster… that is hard to do without layoffs, rising unemployment, and igniting a self-reinforcing negative cycle."

It's unclear just how many rate increases are coming— or how many it would take to push the US economy over the edge.

One rate increase probably won't make much difference, but history shows that the Fed rarely hikes just once whenever it determines that inflation requires action. Some investors and economists even worry the handful of rate hikes the market expects might not be enough to curb AI-driven inflation , potentially requiring the Fed to push rates much higher.

"The Fed creates recessions, and it does so by taking the policy rate too high and/or keeping it there for too long," said Chris Galipeau, senior market strategist at Franklin Templeton Institute. "If we get to three (rate hikes) and go above that, then that's a really big risk."