Fed meeting rate hike debate intensifies as Warsh faces hawkish pressure
Investors see rising odds of a July rate increase as oil prices, chip shortages and inflation concerns test the Fed chair.
By Daniel Okafor · Business Editor
3 min read
The Fed meeting rate hike debate is intensifying ahead of the Federal Open Market Committee’s Tuesday-Wednesday gathering, with investors assigning higher odds to a move after renewed inflation pressures. The meeting matters because Chairman Kevin Warsh, now leading his second policy session, may face visible disagreement inside the central bank after a unanimous hold last month.
After the June meeting, Warsh told reporters officials had a “good family fight” over interest rates even though the committee voted together to keep policy unchanged. CNBC has tallied 13 public uses of that phrase by Warsh since his April nomination hearing, as he has argued for what has been described as regime change at the Fed.
Will the Fed raise rates at the July meeting?
Markets still lean toward no rate increase, but expectations have shifted. CME Group’s FedWatch tool showed investors pricing a 34.2% chance of a quarter-point rate increase Wednesday, up from 12.8% a week earlier.
The immediate pressure comes from several sources. The U.S.-Iran ceasefire has broken down, renewed fighting has pushed oil prices higher, oil inventories are close to operational lows, and shipping has come under attack in the Red Sea, Black Sea and Persian Gulf.
Inflation risks are also showing up outside energy. Chip shortages tied to the artificial intelligence boom have contributed to higher prices for consumer electronics, while large cloud and technology companies have shown no sign of slowing their capital spending, according to the reported market backdrop.
Fed officials have been trying to bring inflation back to their 2% goal, a target it has exceeded for five years. A stronger-than-expected June consumer price index reading eased concerns about an immediate move, but higher oil prices have kept the possibility of a hike alive.
What analysts expect from Fed officials
Oscar Munoz, head of U.S. economics at TD Securities, said in a LinkedIn post that the July meeting would be a “family feud” and that policy would likely remain unchanged for one more meeting. He said hawkish momentum was building and forecast two dissents in favor of tighter policy.
Munoz said a sustained jump in energy prices or more evidence that the AI boom is adding to inflation could lead to a rate increase. He also cited Fed Governor Chris Waller’s warning that “sternly staring at inflation until it melts before our withering gaze is not an option.”
Other Fed officials have also sounded concerned about prices. Dallas Fed President Lorie Logan said earlier this month that inflation had been too high for too long and did not appear to be on a full path back to 2%, with risks tilted upward.
Cleveland Fed President Beth Hammack said inflation remains too high and described the labor market as near her estimate of maximum employment, signaling more concern about prices than jobs. In a social media post, she wrote that she was hearing from businesses calling for action to curb inflation and from consumers struggling to make ends meet.
JPMorgan chief U.S. economist Michael Feroli also forecast a contested decision with at least two hawkish dissents, naming Hammack and Logan. He said Vice Chairman Philip Jefferson, Governor Lisa Cook and New York Fed President John Williams have shown more patience, meaning Warsh would need to make a strong case to secure a majority for a hike.
Bank of America economists said the oil price spike has made the decision close. They expect rates to stay steady but said Warsh has enough support to steer the outcome either way, while reiterating their forecast for three quarter-point increases this year.
This story draws on original reporting from Fortune.