Kevin Warsh has remained cryptic and noncommittal, leaving markets to speculate blindly about policy based solely on remarks from other officials. A rebound in oil prices combined with renewed tariff risks has reignited inflation concerns, tightening once again the Federal Reserve's recently relaxed stance on rate hikes.
Nick Timiraos, often dubbed the 'Fed whisperer,' wrote in an article published on July 23 local time that the Federal Reserve’s July policy meeting is shaping up to be one of the most unpredictable in recent years. Resurgent oil prices, escalating risks surrounding U.S. tariff policies, and a shift among some officials toward supporting further rate hikes are challenging the consensus for holding rates steady.
Markets widely expect the Federal Reserve to maintain its policy rate unchanged at the upcoming Federal Open Market Committee (FOMC) meeting scheduled for July 28–29, keeping the current target range at 3.50% to 3.75%. However, the meeting outcome will not signal an end to internal debate, as some officials have already begun laying the groundwork for additional rate hikes later this year.
At previous meetings, the Fed’s 18 officials were sharply divided on whether further rate hikes would be necessary this year—half projected additional tightening, while the other half saw no need for adjustments. Jonathan Pingle, Chief U.S. Economist at UBS Group, noted that Federal Reserve Chair Kevin Warsh could become the pivotal figure in determining the policy direction.
Inflation risks resurge as hawkish faction pushes for rate hikes
The recent rebound in energy prices has become a key factor influencing the Fed’s assessment. As geopolitical tensions in the Middle East intensify once more, rising oil prices have prompted markets to increase their expectations for a July rate hike.
According to data from CME Group, as of this Wednesday, markets priced in roughly a one-in-three probability of a rate hike at the Fed’s July meeting, up from approximately one-in-ten over the previous weekend.
William English, an economist at Yale University and former senior economist at the Federal Reserve, stated that there are valid arguments both for raising rates and for holding them steady, but the ultimate decision will hinge on whether tensions involving Iran ease and how oil prices evolve.
He argued that if the conflict further drives up energy prices, the Fed could find itself in a reactive position, having failed to act preemptively.
Officials advocating for higher rates contend that the current policy rate range of 3.50% to 3.75% may be insufficient to contain inflation. Although headline inflation has retreated from its peak, underlying core inflationary pressures have yet to fully dissipate.
Federal Reserve Governor Christopher Waller stated that policymakers cannot simply wait for inflation to subside on its own. He noted that while current inflation expectations remain stable, this does not mean the Federal Reserve can afford to ignore potential risks.
Lorie Logan, President of the Federal Reserve Bank of Dallas, also remarked that implementing a 'modestly restrictive policy' now might be more appropriate than being forced to enact significantly tighter measures in the future.
Recent analyses from JPMorgan and Goldman Sachs corroborate concerns raised by Waller and others that inflation is no longer confined solely to energy prices or tariffs, but appears to be broadening across a wider range of categories. Jessica Rindels, an economist at Goldman Sachs, estimates that as of June, nearly 60% of components in the Personal Consumption Expenditures (PCE) price index posted year-over-year increases exceeding 3%.
Although this share is lower than the nearly 80% observed during the pandemic period, it remains substantially above the historical average of 37% recorded between 1990 and 2019—a period when inflation generally remained close to the Federal Reserve’s target.
“People are becoming increasingly frustrated with inflation,” said Dario Perkins, Managing Director of Global Macro at TS Lombard. “After missing the target for six consecutive years, serious questions are being raised about the Fed’s credibility. The Fed’s ability to deflect blame is gone—any further missteps will no longer be tolerated.”
Some officials are also monitoring the rise in demand driven by AI-related investments. Spending on AI infrastructure is boosting capital expenditures and pushing up costs in related sectors. Market participants believe that if demand continues to outpace supply, it could add to inflationary pressures.
Improved data supports a wait-and-see approach; some officials believe the shocks may fade
Meanwhile, officials favoring a pause in rate hikes argue that recent economic data do not justify immediate policy tightening. June inflation data were relatively benign, energy prices declined, and underlying price pressures showed signs of easing; moreover, the labor market has not exhibited clear signs of overheating.
Dean Maki, Chief Economist at Point72 Asset Management, noted that the data received by the Federal Reserve after its June meeting have been more favorable than previously available. Therefore, had the Fed opted to hold rates steady at that time, raising rates immediately afterward in response to improved data would not have been logical.
Officials advocating patience argue that this year’s rebound in inflation has been primarily driven by transitory factors such as tariffs and energy prices. Monetary policy typically requires observing whether such shocks persist before responding through interest rate adjustments.
New York Fed President John Williams previously stated that there are signs inflation may have already peaked and will gradually decline over the coming quarters.
However, recent increases in oil prices and U.S. President Trump’s plans to impose additional tariff measures have once again introduced uncertainty into the path of disinflation.
Nonetheless, several individuals, including Linder, indicated that the breadth of price pressures should narrow by year-end. This makes upcoming inflation data reports over the next few months particularly critical, as Waller’s ‘no guidance’ strategy will be tested by the forthcoming data and his colleagues’ reactions to it.
Waller faces policy choices as markets await signals from the Fed Chair
Since taking office, Waller has repeatedly emphasized that the Federal Reserve must restore price stability and avoid giving markets the impression that the central bank has accepted inflation above its target. However, he has not clearly indicated whether current interest rates are sufficient to achieve this goal, nor has he revealed whether he would support further rate hikes. This approach has complicated market assessments, prompting investors to seek policy direction from statements by other officials.
Waller’s previously hawkish remarks briefly pushed markets to raise expectations for a July rate hike, but subsequent comments by Williams and Federal Reserve Vice Chair Philip Jefferson reinforced market expectations for unchanged rates.
Waller, Williams, and Jefferson form the core group coordinating Federal Reserve policy. Under former Chair Jerome Powell, this group typically reached policy consensus in advance, but Waller prefers to preserve more room for internal discussion during meetings.
Markets currently hold divergent interpretations of Waller’s policy stance. Some investors believe that despite pressure from Trump to cut rates, he will prioritize safeguarding the Fed’s credibility on inflation control; others think he may prefer to wait for productivity gains driven by AI to ease price pressures without rushing to raise rates.
Federal Reserve Governor Lisa Cook stated that AI development is still progressing. Although markets had earlier worried that AI could disrupt employment, the most severe impacts have not yet materialized. However, she also stressed that persistently high inflation is placing significant strain on American households.
As the July meeting approaches, the Federal Reserve must balance inflation risks, incoming economic data, and internal policy disagreements. Waller’s ultimate decision will determine whether this meeting represents merely a pause or a signal of a broader shift in the Fed’s policy direction.
Michael Gapen, Chief U.S. Economist at Morgan Stanley, stated bluntly, "I don't believe he can stay out of it forever."
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