The Federal Reserve is expected to hold interest rates steady when it concludes its two-day meeting Wednesday, but market participants are eyeing the possibility of a surprise hike as patience with high inflation wears thin.
Fed officials have kept rates on hold this year as they wait for temporary price pressures from tariffs and the war in Iran to wane. Concern is mounting, however, that inflation won't reach the Fed's 2% target unless higher rates are used to rein in demand.
The market's uncertainty can be pinned squarely on Chairman Kevin Warsh, who's eschewed the past practice of giving signals on the future path of rates. The new Fed chief has said he's committed to lowering inflation, but hasn't indicated whether he supports increasing interest rates to do so.
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"Regardless of what you think they're going to do, and what they end up doing, this is a great example of the fact that we're in a new era," said Stephen Stanley, chief US economist at Santander US Capital Markets. "We're actually going into the meeting with legitimate uncertainty. While I have them holding off in July, I think there's certainly a non-trivial chance that they go."
The Fed will release a post-meeting statement at 2 p.m. Wednesday in Washington, and Warsh is scheduled to hold his second post-meeting press conference 30 minutes later. He's likely to face a range of questions on the economy and rates, as well as his plans for enacting broader changes at the central bank.
The Fed won't release economic forecasts and rate projections at this meeting.
Hawkish Influence
Fed officials have been in a holding pattern since cutting rates at each of the last three meetings in 2025. But, from January to June, their outlook for rates has seen a significant shift as the labor market stabilized and the downward trend in underlying inflation stalled.
First, an increasing number of Fed officials supported removing a bias toward lower rates in the post-meeting policy statement. Then rate projections released last month showed nine policymakers thought at least one rate hike would be necessary this year. And that hasn't been driven simply by the impact of the Iran war on oil prices.
Governor Christopher Waller - who earlier this year was more concerned about weakness in the labor market - has said in recent months that price pressures are broadening now. This he floated the possibility of a rate increase in the near future. Several other Fed officials have echoed that sentiment.
With Warsh refusing to reveal his own views, uncertainty about what the Fed might do at this meeting has increased. The probability of a hike implied by federal funds futures reached as high as 40% in the run-up to the meeting. As of Tuesday afternoon, investors saw about a 35% chance, a rare level of uncertainty on the eve of a Fed meeting.
A hike would bolster Warsh's credibility, said Derek Tang, an economist at Monetary Policy Analytics. It would show he's serious about his repeated pledge to restore price stability, he said. Leaving rates unchanged risks cementing an "all hat and no cattle" reputation, Tang said.
Still, a surprisingly benign report on consumer prices in June will help make the case for holding off on a rate increase at this meeting. Warsh may argue that officials need more time to assess where inflation is heading.
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If that's the outcome, Fed watchers will be on the lookout for clues on how close the center of the Federal Open Market Committee came to supporting an increase. The rising anxiety about inflation could also mean that some Fed officials dissent. Top candidates include Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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