Fed's Mouthpiece: 3 Officials Advocate Rate Hike, September Decision Eyes Two Inflation Reports

Nick Timiraos of the Wall Street Journal, known as the Fed's mouthpiece, reported that the Federal Reserve maintained interest rates at its Wednesday (29th) meeting, keeping the federal funds rate target range at 3.5% to 3.75%. However, three regional Federal Reserve Bank presidents dissented, advocating for a 1-code rate hike, highlighting the growing hawkish sentiment within the Fed amid long-term inflation above the 2% target.

The decision passed with 9 votes in favor and 3 against, with the policy statement content largely similar to the June meeting. This is the second consecutive meeting where Kevin Warsh, who took over the Fed in May, chose to stand pat.

The three dissenters were Beth Hammack of the Cleveland Fed, Neel Kashkari of the Minneapolis Fed, and Lorie Logan of the Dallas Fed. All three advocated raising the rate range by 1 code.

This is the first time since 2016 that three Fed officials have dissented in the same direction on a policy change. The three had also opposed the policy statement's signal toward rate cuts in April, indicating their stance on inflation risks remains hawkish.

Warsh admitted at the post-meeting press conference that American households and businesses are growing impatient with inflation not returning to target, but the Fed cannot solve the problem immediately.

He noted that the public expects the Fed to deliver results quickly, but the central bank does not have a 'magic' way to quickly eliminate inflation.

Warsh did not clearly state which economic data would prompt the Fed to raise rates. He only offered one policy judgment principle: if decision-makers believe core inflation is rising, they will be more inclined to tighten policy; conversely, if core inflation continues to decline, they will be more inclined to ease policy.

However, Warsh did not indicate which direction he believes core inflation is currently heading.

Warsh pointed out that since the June meeting, both nominal and real interest rates determined by the market have risen. Even without a formal rate hike, the financial environment has tightened to some extent, which was also a consideration for the decision-makers in choosing to maintain rates unchanged this time.

Markets interpreted Warsh's remarks as a reduction in the urgency for the Fed to raise rates in the short term. The 2-year Treasury yield, which is more sensitive to policy rate expectations, fell after the press conference, but long-term yields rose in the opposite direction.

The 30-year Treasury yield rose by approximately 13.6 basis points on Wednesday, marking the largest single-day increase in over a year, reaching 5.228%, the highest level since 2007. The Dow Jones Industrial Average plunged by more than 1,100 points, a 2.2% drop.

Mortgage rates also rose. The latest survey by the Mortgage Bankers Association showed that 30-year mortgage rates rose to 6.76% last week, the highest in nearly a year. This means that even if the Fed pauses rate hikes, the actual financing costs for American households may remain high.

At the Fed's June meeting, about half of the officials thought that a rate hike might be needed later this year. The relatively mild inflation data released two weeks ago reduced the pressure for an immediate rate hike at this meeting, but the recent flare-up of hostilities between the U.S. and Iran pushed energy prices back up, adding another variable to the inflation outlook.

The U.S. has already been affected by price increases due to tariff policies, and now faces rising energy prices and demand pressure from the AI infrastructure boom. The continuous price shocks have led some officials to no longer view inflation as a short-term phenomenon.

The Fed's policy path over the past few years has become more complex as a result. The Fed ended a rapid rate-hiking cycle three years ago, raising policy rates to a high point in over 20 years; as inflation approached the 2% target, the Fed began cutting rates two years ago.

Early last year, concerns that tariffs might push up prices caused the Fed to pause rate cuts. Last autumn, as hiring activity cooled, decision-makers became concerned about the labor market slipping into recession and cut rates again.

However, the expected economic downturn did not occur. The U.S. economy continues to show resilience, and inflation, measured by different indicators, remains around 3% or higher. Recently, it has been affected by Middle East conflicts and the AI investment boom.

Hawkish officials are increasingly focused on the AI infrastructure boom. Billions of dollars continue to flow into data centers and computing capacity construction, with demand possibly exceeding what the U.S. economy can provide in the short term.

Interest rate policy cannot directly eliminate price pressures caused by tariffs or oil price increases, nor can it necessarily stop data center investments that have already largely secured funding. However, rate hikes can still curb demand in other areas of the economy, easing the pressure of overall demand on limited supply.

Officials advocating for rate hikes are concerned that the Fed is still providing support for an economy that no longer needs additional policy support. When the Fed cut rates last year, it was expected that inflation this year would be slightly above 2%; now that inflation is higher than expected, it means that the real policy rate, adjusted for inflation, is more accommodative than decision-makers originally envisioned.

Additionally, U.S. stocks are near historical highs, and corporate financing conditions remain loose, which these officials view as evidence that the U.S. economy can withstand higher rates.

Officials advocating for continued observation believe that current price pressures are primarily due to a series of one-off shocks. As long as households and businesses still expect inflation to gradually decline, the Fed does not need to raise rates immediately.

These officials are concerned that if the Fed reacts to short-term price changes, it may make the mistake of over-tightening policy. Since rate hikes take time to affect the economy, by the time the tightening effects become apparent, the factors that pushed up prices may have already left the inflation data.

The current pattern of inflation also increases the difficulty of policy judgment. The Fed's traditional models usually view inflation as a broad phenomenon centered on the labor market, but most officials believe that current price pressures are not primarily coming from the labor market.

FOMC Vice Chairman and New York Fed President John Williams said earlier this month that he expects inflation to gradually decline in the coming quarters.

Williams noted that if monthly inflation increases remain at 0.2% or lower, when annualized, it would be close to the Fed's 2% target, which can be seen as a signal that the impact of tariffs is gradually fading and core inflation is stabilizing.

If future data is significantly higher than this level, it may mean that inflation is not simply being driven up by one-off costs, but rather that overall demand is exceeding supply capacity. In that case, the Fed may need to take further action.

The Fed's next policy meeting will be held from September 15th to 16th, with two inflation reports available for officials to assess before the meeting.

Kurt Lewis, who previously served as a senior advisor to Bowls and now tracks central bank movements for Piper Sandler, believes that the threshold for the Fed to raise rates later this year is not very high. He expects that inflation still has a chance to improve to a level where rate hikes are not necessary, but the space for the Fed to continue to wait has clearly shrunk.

He stated that if the data over the next two months shows that price pressures are becoming more persistent, the Fed may take action to raise rates.

Some economists have warned that waiting itself carries risks. Daleep Singh, who previously served as the head of the New York Fed and is now the global chief economist at PGIM, pointed out that the price shocks of the past two years are not unrelated single events, but a series of overlapping supply barriers with inflationary effects.

Singh believes that current job growth is sufficient to avoid an increase in the unemployment rate, providing the Fed with a relatively rare policy window to tighten policy without causing significant job losses. If the Fed waits too long, it may need to take more significant rate hike actions in the future.

If the Fed raises rates before or after the mid-term elections this fall, it could reignite conflicts between the central bank and the Trump administration. The relationship between the two had cooled after Warsh took over as chairman in May, but the White House has stated that Warsh himself does not want to raise rates but is under pressure from hawkish officials within the Fed.

Trump has repeatedly called for the Fed to cut rates over the past year and selected Warsh to replace Powell six months ago. Trump had then stated that he would not consider any Fed chairman candidate who viewed strong economic growth as a threat.

As three regional Fed presidents publicly advocate for rate hikes, the divide within the Fed has evolved from a dispute over the wording of the policy statement to an actual opposition on rate decisions. The next two inflation data points will be crucial in determining whether a rate hike will be initiated in September.