Financial markets are bracing for the Federal Reserve to deliver its first interest rate increase since 2023 this Wednesday, driven by policymakers' waning conviction that inflation can cool sufficiently without at least one nudge from the central bank. This anticipated move is set to strain the relationship between Chair Kevin Warsh and President Donald Trump, who has publicly expressed his preference for lower borrowing costs.

Since December, officials have held the benchmark rate steady in a range of 3.5% to 3.75%, when most policymakers believed that progress on lowering inflation was being hampered by temporary factors. However, skepticism within the Fed has steadily intensified this year, and a recent hot inflation report appears to have tipped the scales in favor of at least one short-term rate hike. Investors on Tuesday placed a probability of over 90% on a quarter-point increase this week, while also pricing in an additional hike before year-end.

"At some point, they have to raise rates," said Sebnem Kalemli-Ozcan, a professor of economics at Brown University. "And actually, the longer this is delayed, the more stubborn inflation will become, and the bigger the problem will be."

The Fed is scheduled to release its statement at 2 p.m. in Washington on Wednesday, alongside updated economic and interest rate projections. Warsh is set to hold a post-meeting press conference 30 minutes later. White House concerns are mounting, and the rate hike could invite fresh criticism from the administration. Just on Sunday, Trump repeated his argument that the U.S. should have the lowest borrowing costs globally, though he has significantly toned down his attacks on the Fed since appointing Warsh to replace Jerome Powell as chair. The president even hinted that Warsh is being pressured by other Fed officials to raise rates, accusing them of being "highly political."

In a late August speech, Warsh made it clear that underlying price pressures had not shown substantial improvement, warning that the Fed "still has work to do" unless it received new assurances that inflation was on track toward the central bank's 2% goal. Two weeks later, data revealed that core inflation—excluding food and energy—rose more than expected in August. Although the increase was largely driven by a record surge in wireless phone services, many analysts argue that the Fed cannot ignore the report after missing its 2% target for over five consecutive years.

Warsh's remarks during the press conference will be closely watched. In his July 29 post-meeting appearance, he failed to provide a clear explanation for the Fed's decision to hold rates steady and offered little insight into his views on the economy. That omission triggered a jump in long-term Treasury yields and drew criticism from traders and economists alike. Yet, Warsh's speech last month in Jackson Hole, Wyoming, appeared to soothe investor concerns, and a rate hike on Wednesday could further repair any residual damage.

Reporters are likely to press the chair again for an explanation of the committee's decision, aiming to capture any hint of whether this increase could mark the beginning of a tightening cycle. While he is unlikely to offer explicit guidance on the future path of rates, continuing to avoid sharing his perspective on current economic conditions could once again frustrate investors.

Dissenting votes may also emerge. Anxiety within the Fed has built throughout the year, as a series of seemingly temporary factors—including tariffs and the Iran conflict—risk entrenching high inflation into public expectations. At the Fed's July meeting, three officials dissented in favor of a rate hike. A move this time could draw support from several colleagues who, prior to the August inflation report, had indicated they needed to see improved price data before maintaining the current policy stance. However, the decision may not be unanimous. Governor Christopher Waller has sent mixed signals on inflation, while New York Fed President John Williams stated earlier this month that there is still evidence of disinflation underway. Several economists also predict that Vice Chair for Supervision Michelle Bowman, viewed as closely aligned with White House positions, could dissent in favor of holding rates steady.

Policymakers will also submit updated economic and interest rate projections this week. In a recent survey, economists expected their outlooks for unemployment and inflation to remain largely unchanged. The rate projections should reveal how many officials anticipate additional hikes this year. However, these projections are unlikely to include Warsh's contribution, as he did not participate when officials last submitted their forecasts in June.