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All eyes are on Friday’s inflation report for a key reason: It could prompt officials at the Federal Reserve to raise interest rates.
Policymakers stipulated this summer that if inflation did not soon moderate, they stood ready to take action. Officials have yet to define what exactly “soon” means, but many have run out of patience.
Policymakers are also digesting a multitude of new risks. The global price of oil is back up above $100 a barrel as the war with Iran continues to disrupt supply. President Trump has reignited a trade war with Canada. And on Wednesday, he floated distributing a $5,000 check to every American adult if Republicans keep control of Congress in November elections. Such a boost to economic activity could further fuel inflation, which has run well above the Fed’s 2 percent target for more than five years.
The stakes for Kevin M. Warsh, the Fed chairman, are high, whichever direction he goes. Late last month, Mr. Warsh delivered a closely watched speech at the central bank’s annual conference in Jackson, Wyo., that sought to underscore his commitment to fighting inflation after some doubts had emerged.
He indicated enough of an openness to raising rates that investors now believe an increase at the Fed’s meeting on Tuesday and Wednesday is more likely than not. But Mr. Warsh purposely left vague what would tip him in either direction.
“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he said. “Otherwise, we have work to do.”
A mixed inflation report — one that is neither hot nor cold — would create complications for Mr. Warsh. Opting to hold rates steady with that data in hand would risk a reaction similar to the one he faced in July. Back then, he failed to provide sufficient reasoning for standing pat and sowed confusion about how he planned to make good on his pledge to extinguish elevated inflation.
The Fed’s preferred inflation gauge is the Personal Consumption Expenditures price index, but the central bank also pays close attention to the Consumer Price Index and other metrics. Regardless of whether it’s C.P.I. or P.C.E., officials focus most closely on the “core” measure, which strips out volatile food and energy prices and is thought to be a better measure of underlying inflation.
Economists expect core inflation in August to have risen 0.2 percent from July and 2.4 percent from a year earlier. Overall inflation is projected to have steadied at an annual pace of 3.4 percent after a 0.4 percent increase for the month.
Mr. Warsh’s job as chairman next week will be to corral his colleagues to support either a decision to raise rates or keep them steady. A group of Fed policymakers have already expressed support for raising rates on the basis that the central bank’s current policy settings are not restraining economic activity. Higher rates would not only expedite the return of 2 percent inflation, they argue, but also ensure that expectations about inflation did not suddenly shift higher.
Yet raising rates just months before the election would undoubtedly stoke tension with Mr. Trump. Last week, the president threatened to halt a broad swath of U.S. trade unless the Fed slashed rates. Cutting borrowing costs is not even under consideration.
The counterargument to raising rates rests on the assumption that inflation is going to decelerate in the latter half of the year, giving the Fed flexibility to hold off on taking action. John C. Williams, president of the Federal Reserve Bank of New York and vice chair of the policy-setting committee, espoused this view, arguing that policy was in a “good place.” Still, he made clear that he would support higher rates if the data did not cooperate.
Christopher J. Waller, a Fed governor, also recently suggested that he was inclined to hold rates steady next week, but only if inflation continued to cool.
“What’s the cost of waiting one meeting? Hiking 25 basis points one meeting right now is not going to bring the C.P.I. down to 2 percent,” he said at an event last week. “You want to take a chance to see if disinflation continues, but I’m not taking a big chance on it.”
Comments like these suggest that Mr. Warsh has internal support in both directions, meaning he has the ability to sway the committee as he sees fit. But investors have been left guessing what Mr. Warsh wants, because of his opposition to sending explicit signals about the Fed’s next steps, injecting heightened uncertainty into the decision.
Policymakers at the bank, which sets rates for the 21 countries that use the euro, lifted their key rate a quarter point, to 2.5 percent. It was the second increase since the United States and Israel attacked Iran in February, starting a war that has sent global energy prices sharply higher.
“The conflict in the Middle East continues to generate inflation pressures,” Christine Lagarde, the president of the central bank, said at a news conference in Berlin.
The world’s major central banks are under pressure to respond to rising inflation with higher interest rates amid jitters in the bond market, where investors are alert to rising debt and widening deficits by some of the world’s richest nations. In recent weeks, government bond yields have risen to levels not seen in more than a decade.
Next week, policymakers at the U.S. Federal Reserve, the Bank of England and the Bank of Japan will meet to set interest rates. In the United States, traders have increased bets that the Fed will lift rates this year, potentially as soon as next week. In Japan, officials are widely expected to increase rates next week. In Britain, traders are betting on a rate increase by the end of the year.
The eurozone inflation rate climbed to 3.3 percent in August, the fastest pace in nearly three years. It was mostly caused by higher energy prices.
The E.C.B. said inflation would stay above its 2 percent target for the next few years even as some prices it watches closely — such as food — hadn’t increased as much as feared. The bank raised projections for headline inflation next year and also in 2028, when, it said, inflation would average 2.1 percent, adding to expectations that further rate increases might be warranted. The bank also said economic growth this year and next would be stronger than the earlier forecast because of better-than-expected economic resilience.
Still, “the outlook remains highly uncertain,” Ms. Lagarde said.
On the one hand, the unpredictable nature of the war in the Middle East could cause energy prices to rise faster, which in turn increases the risk of inflation pressures throughout the economy. But that could also weigh more heavily on economic growth.
The European economy has so far proved surprisingly resilient to the energy shock, but there are growing concerns about the coming winter. The continent has relatively low levels of gas storage for this time of year, and it could be very expensive to warm homes and run industrial businesses if lots more gas needs to be bought at high prices.
The bank said the eurozone economy would grow 0.9 percent this year and 1.4 percent in 2027, both modest upgrades from forecasts made in June. But, it added, there were downside risks to this forecast.
Although the E.C.B. rate increase announced on Thursday was widely expected, investors were hunting for clues about where the bank would go next. The rate move was unanimous, Ms. Lagarde said, but policymakers didn’t discuss future policy decisions. Traders are betting that there will be at least two more rate increases by the middle of 2027, with some economists forecasting one as soon as December.
“Solid growth and high energy prices are adding to inflation pressures, and policymakers have already signaled they will not tolerate this environment should it persist,” Simon Dangoor, the deputy chief investment officer of fixed income at Goldman Sachs Asset Management, wrote in a note.
That said, some analysts argue that rates may not need to rise significantly because there is limited evidence that inflation is becoming deeply embedded in the economy through higher wages, and because high energy prices could dampen growth.
Even though inflation risks are rising, “the E.C.B. still needs to tread carefully,” said Mark Wall, the chief European economist at Deutsche Bank.
Beyond the latest interest rate decision, speculation has been building that Ms. Lagarde will step down from her role before the end of her term in October 2027, to make way for a transition during a politically sensitive time in Europe.
A new president would be chosen by European political leaders. Some analysts have suggested she’d step aside before French presidential elections next spring amid concerns about the impact a far-right winner could have on key European appointments, including at the central bank. But economists argue that role is likely to be filled through political compromise, and that the influence of one country should not be overstated.
Last week, a book publisher announced that Ms. Lagarde would publish a memoir at the end of January, which added to the intrigue about a potential early departure.
On Thursday, Ms. Lagarde said she would market her book during weekends and vacation time so it wouldn’t conflict with her public duties at the central bank. “I strongly encourage you to buy the book,” she quipped during the news conference. “It will include nothing on monetary policy.”
She also said there was “nothing to report” about her leaving her job early.
The Treasury Department said on Wednesday morning that it would repurchase up to $6 billion of its own long-dated debt, fulfilling a promise to at least double its regular debt buybacks as it seeks to tame borrowing costs that have drifted steadily higher in recent months.
The Treasury’s repurchases effectively reduce the available supply of longer-dated bonds, pushing their prices higher and lowering their yields, with the aim of lowering interest rates more broadly.
The purchases, scheduled to be carried out Thursday afternoon, will increase the size of the Treasury’s buyback operation for debt maturing in 10 to 20 years to $6 billion, from $2 billion last month.
The initial market reaction suggested investors were underwhelmed by the size of the announcement, with analysts at Wells Fargo noting that the rise in Treasury yields “shows that some market participants were likely expecting larger operations.”
There are roughly $30 trillion in outstanding treasuries, with the market trading over $1 trillion every day, according to data from the Securities Industry and Financial Markets Association.
The 10-year Treasury yield rose as much as 0.05 percentage points to its highest level since October 2023 before easing through the afternoon to 4.82 percent. The 20-year yield rose by a similar amount, before falling back to around 5.28 percent, also its highest since late 2023.
The sharp rise in yields after the announcement came before the government sold $39 billion worth of new 10-year notes, with the interest rate on the new debt the highest the government has paid in 20 years. The high yield lured buyers into the market, with the debt sale oversubscribed by 2.7 times. That demand helped ease the earlier rise in yields, though both 10-year and 20-year yields remained higher for the day.
Speaking at Southern Methodist University on Tuesday, Scott Bessent, the Treasury secretary, defended plans to make the bond market move. He argued that markets were misreading the fundamental dynamics of the U.S. economy and noted that, for investors, American bonds had outperformed the bond markets of many other countries.
A former hedge fund manager who once tried to capitalize on fast-moving market anomalies, Mr. Bessent said his job as Treasury secretary was to ensure that markets were not misreading the fundamental dynamics of the economy.
“Now I try to slow things down, to get people to get out of their fever dream and look at the facts,” Mr. Bessent said.
When Mr. Bessent first signaled his plan to increase Treasury repurchases in mid-August, bond yields fell as intended. But that decline has since reversed and then some, with yields creeping higher on a combination of factors. These include a rising growth outlook tied to artificial intelligence, widening government deficits and expectations that the Federal Reserve may raise interest rates to fight inflation stemming partly from continued turmoil in the Middle East.
It has left the head of the Treasury in a communication challenge with his counterpart at the Federal Reserve. Kevin M. Warsh, the Fed chairman, is trying to convince investors that he is serious about tackling inflation and that if necessary, he will raise the short-dated interest rates the Fed controls. At the same time, Mr. Bessent is trying to talk tough on lowering the longer-dated Treasury yields that underpin many of the interest rates that affect consumers.
Mr. Bessent also defended his recent intervention in currency markets to prop up the Japanese yen. Despite criticism that he is trying to bend markets to his will, Mr. Bessent made the case that he knows more than investors and has the power to dictate how markets will behave.
“Whenever people say, Oh, well Treasury secretary is taking a risk, it’s my dream,” Mr. Bessent said. “I have asymmetric information. I am the house now.”
Explaining that he knows what the Bank of Japan and Japanese policymakers are going to do, he added: “You can bet against me if you want.”
