Federal Reserve officials will hold a policy meeting this week, facing a resurgence of inflation pressures that could make their decision to keep interest rates unchanged or raise them difficult and potentially controversial.
Tensions in the Middle East have intensified once again, driving oil prices higher and overshadowing the lower-than-expected rise in the June consumer price index (CPI), which appears to give Federal Reserve officials a breather to maintain stable interest rates. Additionally, surging demand fueled by artificial intelligence and new tariff measures announced by the Trump administration have led Fed watchers to anticipate potential divisions if policymakers keep policy unchanged at their meeting on July 28–29.
In recent days, investors have increased their bets on the central bank raising interest rates at this week’s meeting, pushing the probability of a rate hike as high as nearly 40% last week.
“The Middle East conflict situation is undoubtedly escalating, increasing the risk of a significant rise in oil prices,” said Alex Payne, senior portfolio manager at Vanguard. “Due to these geopolitical issues, markets are adjusting to account for the risk of inflation becoming more persistent.”
Market expectations for a July Federal Reserve rate hike have declined due to weak inflation data, but they have rebounded as renewed tensions in the Middle East pushed oil prices higher.
An increasing number of policymakers have outlined their reasons for supporting a rate hike now or in the near future.
Dallas Fed President Lorie Logan earlier this month called for a modest rate hike, arguing that inflation is unlikely to sustainably return to the Fed’s 2% target. Cleveland Fed President Beth Hammack recently expressed a similar view, stating that the Fed’s mandates “are not in conflict” and that inflation is currently more concerning than employment. Both will vote on this week’s interest rate decision, and they may vote against maintaining rates if officials choose to keep them unchanged.
Claudia Sahm, chief economist at New Century Advisors, said: “It’s clear from Federal Reserve officials’ comments that a small group, such as Logan and Harker, may already be ready to act, while others are hoping to see greater improvement—and the sooner, the better.”
Federal Reserve Chair Kevin Warsh reaffirmed the Fed’s commitment to reducing inflation, vowing this month at Capitol Hill to use central bank tools to achieve price stability. However, his reluctance to disclose specific measures has left markets guessing about the direction of interest rates—even in the short term.
Veronica Clark, an economist at Citigroup, said that given the relatively moderate inflation data in June, officials may be inclined to keep interest rates unchanged. She also noted that if future data show limited impact from rising energy prices and increasing unemployment, policymakers might choose to maintain borrowing costs at current levels or even cut them.
Some officials have indeed indicated that the Fed can afford to remain patient. However, they also pointed out that if inflationary pressures persist, the Fed may need to raise interest rates at its upcoming meeting.
“If actual inflation does not begin to cool in the near term, I think it may be appropriate to reconsider our current policy stance,” said Federal Reserve Vice Chair Philip Jefferson two days after the consumer price index report was released.
Joseph LaVorgna, chief economist for the Americas at SMBC Nikko Cordial USA and former Treasury official during President Donald Trump’s second term, said that a rate hike this month could help Wall Street build credibility in its fight against inflation, and may be seen as less politically charged compared to a hike closer to the November midterm elections.
