Warsh and Trump on collision course

Warsh and Trump on collision course. Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenuKey PointsPresident Donald Trump's policies are a big reason the Federal Reserve, led by his appointee Kevin Warsh, has to consider a rate increase this week.

What happened

President Donald Trump speaks with the new chairman of the Federal Reserve, Kevin Warsh, after a swearing-in ceremony in the East Room of the White House, in Washington, May 22, 2026. So it's ironic that a direct line can be drawn from Trump's policies to what looks like an inevitable rate increase Wednesday by the Fed, likely to be spearheaded by his handpicked Fed chairman, Kevin Warsh. Anna Moneymaker | Getty ImagesBefore President Donald Trump reels off angry Truth Social posts if the Federal Reserve hikes rates this week, he should look in the mirror: His policies are a big reason the central bank has to consider a rate increase.

It was a sign of the Fed's continued willingness to "look through" policies of the Trump administration that resulted in higher prices and to treat them as "one-offs. The message to the Fed once again is there is no guarantee of anything, especially tariffs, being one-off in the Trump presidency. In his Jackson Hole, Wyoming, speech, Warsh said if the Fed wasn't confident that underlying inflation was declining, it would have "work to do. " Warsh could gain that confidence with an apparent path to an end to the Iran war or some assurance that the president is satisfied with the current tariff regime.

The wider picture

"Fed's credibility at stakeThe president has forced Warsh's hand to hike in another, more subtle way. The proof of this came from Warsh's first congressional testimony where he said a sign of his independence came in his failure so far to cut rates as the president had desired. Warsh would be unlikely to hike solely because of the credibility issue. "Everything is pointing in the direction of September as a time to move if Warsh and his colleagues are going to maintain credibility,'' former Vice Chair Roger Ferguson said on CNBC. watch nowVIDEO2:2502:25September is the time to hike if the Fed is going to maintain its credibility: Roger FergusonSquawk BoxNow, with inflation above target and no visibility on lower oil prices or stability of tariffs, the Fed chairman needs to pass the test that has faced his predecessors: proving to markets he's willing to risk a downturn and defy the administration to combat inflation, no matter what party is in power.

On that basis, given recent developments in Iran and the Trump administration's actions regarding tariffs, it would seem difficult for the Fed to assess them as anything but leading to higher inflation in the months ahead. Central bank chair under pressure to back warnings on inflation with action despite risking president’s ire Reescalating tariff battles and a persistent Iran conflict have both resulted in sharp changes to the inflation outlook and may no longer be able to be dismissed as one-off supply shocks.

The Fed chairman needs to pass the test that has faced his predecessors: proving to markets he's willing to risk a downturn and defy the administration to combat inflation.

What has been reported

In March, one month after the beginning of the Iran war, with oil near $100 a barrel, the average Fed official was still forecasting a rate cut this year and another one next year. "Six months later, the Fed stands on the verge of what markets expect to be the first rate hike since 2023. And futures markets predict this is will not be a one-off increase. At least three hikes are priced in through March of next year.

It's a stark turnaround, but not one based on bad forecasting. No president has publicly harangued and harassed the Fed more to lower interest rates. Tariffs and IranTwo aspects of the president's policies look to be forcing the hand of the Fed. Tariffs and the Iran war have both resulted in sharp changes to the inflation outlook.

What happens next

But, second, and potentially more consequential, may be the inability to judge the trajectory of policy. The Iran war, six months on, looks to have no end in sight. The situation has clearly worsened with the temporary shutdown of the Saudi East-West pipeline. Fed officials need to consider that oil prices won't be falling quickly. The president himself no longer responds to crude price increases with a proclamation of an imminent deal with Iran. The surge in diesel prices to $6 a gallon threatens to push inflation deeper into the economy, such as food and transportation costs.

The president said on Monday that diesel prices have risen more because of the war in Ukraine than the war in Iran.