Will the Fed hike rates in July? Hawkish voices grow louder as Chair Warsh vows 'zero tolerance' on inflation

Federal Reserve Chair Kevin Warsh this week reiterated that the Fed is closely monitoring inflation, and the credibility of this commitment may soon be tested.

According to Bloomberg, Fed officials are expected to hold rates steady at their policy meeting in Washington on July 28–29.

However, with oil prices surging again and the artificial intelligence (AI) boom driving up technology equipment costs, the 'family debate' within the Fed led by Warsh could come to the forefront in upcoming meetings.

Just before Fed officials enter the legally mandated 'quiet period' ahead of the July rate decision, officials delivered a series of密集 remarks over the past week, highlighting internal divisions: some warned of the need for swift action, while others argued for waiting for more economic data before deciding on policy direction.

Warsh took a clear stance, emphasizing the Fed's 'zero tolerance' for inflation. He stated that under his leadership, persistent price increases would not be allowed to last, and while June’s inflation data was better than expected, it was far too early to declare victory over inflation.

Testifying before Congress, Warsh told lawmakers: 'My commitment to you is to break price stickiness.'

Notably, Warsh did not explicitly state that a rate hike might be necessary, but his tone was notably strong.

Given that Warsh was nominated by President Trump, who has clearly expressed a desire for the new chair to cut rates, Warsh’s stance is particularly noteworthy.

Fed Vice Chair Philip Jefferson, speaking on Thursday (16th), went further, saying the Fed would consider hiking rates if inflation fails to cool, though for now, monetary policy remains in an appropriate position.

Fed Governor Lisa Cook also said she is prepared to act if necessary, but policymakers still have time to assess upcoming economic data. New York Fed President John Williams believes inflation may have already peaked.

Hawkish voices grow louder within the Fed

Yet, clear divisions remain within the Fed, with other officials expressing greater urgency and calling for swift action.

Dallas Fed President Lorie Logan advocates for further rate hikes; Fed Governor Christopher Waller and Cleveland Fed President Beth Hammack also warned that there are already grounds for a rate increase.

Hammack said this is the first time in her two years in office that businesses have uniformly told her the Fed must act to curb inflation.

Logan, Waller, and Hammack all have voting rights at the July monetary policy meeting, meaning some officials could cast dissenting votes, and an unexpected decision cannot be ruled out.

After all, Warsh has made it clear he does not intend, unlike his predecessor, to signal rate moves to the market in advance.

Still, like investors, most analysts believe a July rate hike is unlikely.

Heather Long, chief economist at Navy Federal Credit Union, said: 'The Fed’s stance is indeed more hawkish than before, but the decision-makers aren’t in a rush to act. The real key is whether inflation has spread to broader sectors and whether it’s persistent—and that will take time to observe.'

Although U.S. June CPI fell for the first time in six years and a core inflation measure was nearly flat, this respite may be short-lived. Rising U.S.-Iran tensions are pushing oil prices higher again; economists also point out that AI-driven demand is becoming a new source of inflationary pressure.

The November U.S. midterm elections add a political dimension to the Fed’s decisions. In September 2024, the Fed cut rates before the presidential election, which Trump criticized as a 'political maneuver' to help Democratic candidate Kamala Harris.

Bloomberg suggests that if the Fed shifts to hiking rates this fall, it could face political pressure from the White House.

During his nomination process, Warsh proposed a rate-cutting roadmap, partly based on the expectation that AI would significantly boost productivity. However, if inflationary pressures persist and remain high, he may have to hike rates to fulfill his promise to contain inflation.

Diane Swonk, chief economist at KPMG, said the biggest risk is that a series of one-off price shocks in the U.S. could entrench inflation expectations, forcing the Fed to reverse the rate cuts implemented a year ago.

Swonk noted: 'Hawkish voices are moving from the Fed’s periphery into the core of decision-making. More officials are now questioning the final rate cuts planned for 2025.'