It’s not a foregone conclusion that the Federal Reserve will hold interest rates steady this afternoon. A rate hike is still on the table.
“The spike in oil prices has made the July Fed decision a close call. We expect a hold, but [Fed Chairman Kevin] Warsh has enough votes either way,” Bank of America US economist Aditya Bhave wrote in a note.
Traders are placing the odds of a rate hold at 64.2% as of Wednesday morning — down a few percentage points from a day earlier.
There are sound arguments for hiking and holding. The decision will come down to how Federal Open Market Committee Members currently view inflation.
At the Fed’s June meeting, half the FOMC members expected to need to raise rates this year, while the other half thought they could hold rates steady. Warsh didn’t show his hand and could tip the central bank in either direction.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
Minutes from the June meeting revealed that if inflation were to dissipate, most officials favor holding rates steady or eventually lowering them. However, if inflation remains elevated due to a combination of a stable job market, strong AI demand, the Middle East conflict, and the effects of tariffs, almost all officials see raising rates.
Several officials — including Fed Governors Lisa Cook, Chris Waller, and Philip Jefferson — have suggested they’re content to hold rates steady in July. But they have also said that if inflation doesn’t start to cool soon, then a rate hike would be under consideration.
Waller in particular noted that if the Fed got another hot reading on core inflation, officials would need to consider hiking rates “in the near term.” However, the Consumer Price Index for June showed that growth in core prices, which exclude food and energy prices that have surged, slowed to 2.6%, from 2.9% in May, suggesting that there is breathing room to wait. Officials have been monitoring whether higher energy prices bleed through to “core” prices, raising prices across the economy and signaling broader inflation.
“The strongest case for holding rates steady … is that a hike would send a confusing signal about how the Fed responds to data,” said Michael Feroli, chief economist for JPMorgan Chase. “The Committee voted unanimously at the last meeting to keep rates on hold. Since then, there’s been one inflation reading, and the core measure was the softest in years.”
Feroli said he thinks enacting a hike would require a strong case from Warsh.
