Fed May Hike Rates This Week! Analysts: AI Spending, Oil Prices, Tariffs, and Inflation as Key Drivers

Markets generally anticipate the Federal Reserve (Fed) will initiate a rate hike at its September meeting. However, Neil Dutta, Chief Economist at research firm Renaissance Macro Research, warns this rate hike could arrive sooner than expected—even as early as this week.

According to Business Insider, the Fed will hold its latest interest rate meeting on July 28. In a report sent to clients on July 22, Dutta stated bluntly that the market may now be at a 'time to bet against consensus,' with the report’s title directly asking: 'Why not hike rates now?'

Dutta points out that, considering Fed Chair Kevin Warsh’s hawkish stance during his first meeting last month, along with multiple factors supporting higher inflation—such as a robust labor market, massive AI-related spending, persistently high oil prices, and tariff impacts—a rate hike in the coming months is 'obviously' on the horizon.

He also notes that service-sector inflation is currently trending upward, and the impact of rising oil prices will continue to gradually feed into service costs.

Data shows the June inflation rate was 3.5%, down from 4.2% in May, but still significantly above the Fed’s 2% target.

Meanwhile, amid escalating U.S.-Iran tensions, Brent crude oil prices briefly surpassed $100 per barrel on the 23rd, marking a new high since May. As a result, the yield on the U.S. 10-year Treasury note rose to 4.7% on the same day, reflecting renewed market concerns about inflation returning.

According to data from CME’s FedWatch tool, investors currently assign a 66% probability to the Fed holding rates steady in July, while the chance of a rate hike in September stands at 57%. Looking ahead to October, the market assesses the probability of one to two rate hikes having occurred by then at a much higher 79%.

Despite this, Dutta believes the Fed has strong reasons to act early rather than wait until September, with the key being that 'proactive action' is more favorable than 'reactive response' in maintaining control over policy timing.

In his report, he wrote that a majority of Federal Open Market Committee (FOMC) members already support a September hike, 'Rather than waiting until September, when there will be almost no flexibility, it’s better to act now and demonstrate a certain degree of control over policy decisions.'

In other words, acting early would allow Chair Warsh greater flexibility in future decisions.

Warsh officially took over as Fed Chair in May this year, succeeding Jerome Powell after his second term ended. Since taking office, he has consistently emphasized his determination to combat inflation.

Notably, Dutta is not the only analyst with this view. Ed Yardeni, President of Yardeni Research, had already forecast in May that the Fed’s rate hike could be brought forward to July.

At the time, he pointed out that the 2-year Treasury yield had clearly risen and broken above 4%, a metric that has historically moved closely in tandem with changes in the federal funds rate.

The current federal funds rate range is 3.5% to 3.75%.