The head of the Federal Reserve is on a collision course with Donald Trump after US inflation figures piled pressure on the central bank to defy the President and raise interest rates.
The chances of a rate rise next week jumped from 70 per cent to 85 per cent, according to bets on financial markets, after official figures showed inflation remained stubbornly high at 3.4 per cent in August.
A hike would put new Fed chief Kevin Warsh at loggerheads with Trump just months after his appointment by the President. Trump has constantly called for interest rates to be cut.
But, like other central banks, the Fed is increasingly concerned about a fresh inflation shock following a sharp rise in oil prices in recent days to close to $110 a barrel.
Richard Carter, head of fixed interest research at Quilter Cheviot, said rate cuts were now firmly off the table regardless of what President Trump may wish for. He said Kevin Warsh and the rest of the board had a high-stakes decision to make on whether to hold or hike interest rates.
Other central banks moving too
The European Central Bank, which sets monetary policy for the countries that use the euro, raised rates this week in a bid to control eurozone inflation.
The Bank of England looks set to leave UK rates unchanged at 3.75 per cent on Thursday next week, but investors are betting on a hike to 4 per cent in November followed by a further three increases by July next year, taking the rate to 4.75 per cent. The Bank of England is the United Kingdom's central bank and sets the base interest rate that influences mortgage and savings rates across the economy.
Higher rates would spell misery for millions of borrowers with mortgages as well as businesses and the government, as the interest rate bill on the ballooning national debt spirals.
Oil prices and energy bills
Soaring energy prices have wreaked havoc on financial markets this week, with oil jumping from around $95 a barrel to close to $110 on Friday before dipping to $105.
Motorists are already feeling the squeeze, with fuel prices at a new four-year high. Higher energy bills are set to follow, according to industry experts.
Regulator Ofgem, which sets the energy price cap for households in Great Britain, has already announced that the cap will increase by £60 to £1,723 for a typical household on a dual-fuel tariff in October.
The latest forecast from energy giant E.ON suggests the cap could rise by another £304 in January, to a three-year peak of £2,027, a punishing 18 per cent increase. That would leave the typical household bill £459, or 29 per cent, higher than it was when Labour came to power in July 2024, when the cap was set at £1,568.
Bond markets and the FTSE 100 sell-off
Fears over higher inflation and rising interest rates, as well as more borrowing and spending under Labour, have sparked a brutal sell-off in government bonds.
The yield on 30-year gilts, a key measure of UK borrowing costs that rises when the value of the bonds falls, hit a 28-year high close to 6 per cent this week.
Ructions on the bond markets coincided with a stock market sell-off. The FTSE 100 index, London's benchmark share index of the 100 largest companies listed on the London Stock Exchange, clocked up its worst week since July, falling 1.7 per cent, or 180 points, even after clawing back some losses on Friday.
