To raise interest rates or not to raise interest rates? Warsh faces his first major decision in office this week

To raise interest rates or not to raise interest rates? Warsh faces his first major decision in office this week.

On Tuesday local time, the Federal Reserve will start its two-day July interest rate meeting. Now, the U.S. economy is facing renewed price pressures, which may make their decision on whether to keep interest rates unchanged or raise them even more difficult—and destined to be full of controversy.

Traders in the interest rate market now believe there is more than a one-third chance that the Federal Reserve will announce a rate hike this week after rising tensions in the Middle East pushed up oil prices and heightened concerns about inflation and rising U.S. Treasury yields.

Last week, affected by the threat of an escalation of the Iranian war, the price of Brent crude oil futures once rose to more than $100 per barrel. As a result, the benchmark 10-year U.S. bond yield rose 13 basis points in a single week, once reaching 4.71%, the highest level since the beginning of 2025; the 30-year U.S.

bond yield also hit 5.19%, close to the highest level in the past 20 years. A renewed surge in oil prices has cast a shadow over the Federal Reserve's policy decision on July 29, as investors weigh whether officials will raise interest rates for the first time since 2023.

Federal Reserve Chairman Kevin Warsh has previously abandoned the Fed's long-standing practice of hinting at interest rate trends in advance.

This has led industry insiders, including Nick Timiraos, a well-known journalist known as the "New Fed News Service", to generally believe that this meeting will be one of the most unpredictable Fed interest rate meetings for investors in recent years.

Data from the interest rate swap market shows that the probability of the Federal Reserve raising interest rates by 25 basis points this week is about 37%, and traders have fully digested expectations of a September interest rate hike.

However, it is worth noting that almost all economists surveyed by the media believe that the Fed will keep interest rates unchanged this week. In any case, even if the Fed finally keeps interest rates unchanged on Wednesday, this meeting is bound to see more opposition to raising interest rates.

Over the past few weeks, a growing number of policymakers have made clear their case for raising interest rates now or soon. Dallas Fed President Logan called for a small rate hike earlier this month, arguing that inflation would not sustainably return to the Fed's 2% target.

Cleveland Fed President Hammack also expressed his opinion recently, saying that the Fed's dual mission responsibilities "are not in conflict" and that inflation is currently more worrying than employment. Both will vote on this week's rate decision - and may vote against it if Fed officials ultimately decide to maintain the status quo.

"It's clear from the Fed officials' comments that there is a small group of people -- like Logan, like Hammack -- who may be ready to take action," said Claudia Sam, chief economist at New Century Advisors LLC.

"The other group of officials, who are quite large, want to wait and see for more signs of improvement in inflation." In fact, even at last month's meeting, when Fed officials decided to keep interest rates unchanged for the fourth consecutive time, a handful of Fed policymakers believed there was a case for raising interest rates.

Minutes from the meeting show most officials discussed scenarios in which inflation remained high due to artificial intelligence-related demand, conflict in the Middle East or the impact of tariffs. Nearly all members of the group said such a scenario would likely require a rate hike.

Since the last meeting, the Trump administration has announced that it will impose new tariffs on Canada and other trading partners, the fragile ceasefire agreement between the United States and Iran has completely broken down, and the strong AI investment boom has shown no sign of slowing down.

It can be said that the severity of the three major inflation risks that the Federal Reserve currently attaches most importance to is not decreasing but increasing.

Federal Reserve Chairman Kevin Warsh reaffirmed the Fed's commitment to curbing inflation earlier this month, vowing in a testimony on Capitol Hill to use central bank tools to achieve price stability.

But he was unwilling to specify how he planned to use these tools, leaving markets still speculating about the direction of interest rates — even in the short term.

Institutional investors should be prepared In this regard, Pradeep Bhatia, CEO of Derivative Path Inc., a derivatives service provider dedicated to helping financial institutions hedge interest rate and exchange rate risks, said: "About one-third of the banks we work with are preparing for further interest rate increases, and the rest are guarding against the risk of interest rate cuts.

This clear differentiation shows that the market has stopped predicting the pace of the Federal Reserve, and has begun to prepare for both outcomes at the same time." "The conflict in the Middle East is undoubtedly heating up, and for crude oil, the risk of a sharp rise from current levels has increased," said Alex Payne, senior portfolio manager at Vanguard Group.

"Markets are adjusting to the risk that inflation could become more stubborn due to some of the geopolitical issues." At present, many institutions believe that the Federal Reserve may raise interest rates this month. Another reason mentioned at the same time is the consideration of political factors.

Joseph Lavorgna, chief economist for the Americas at SMBC Nikko Securities Americas and a former Treasury official, pointed out that raising interest rates this month will help Warsh establish his authority and credibility in fighting inflation, and compared with interest rate actions near the November midterm elections, raising interest rates at this time is less politically sensitive.

In September 2024, a few weeks before the presidential election that year, the Federal Reserve under Powell unexpectedly lowered interest rates by 50 basis points. Trump later criticized Powell, then chairman of the Federal Reserve, calling the move a "political move" aimed at helping his opponent, former Vice President Harris.

"What would happen if the first interest rate hike was delayed until September or October, on the eve of the midterm elections? He might as well raise interest rates now," Lavorgna said.

He added that Warsh might be able to placate the president by positioning the rate hike as a move to curb inflation expectations and thereby help push down the long-term market rates Trump is concerned about. Of course, there are obviously many industry organizations that support the Fed's decision to remain on hold this week.

Citigroup economist Veronica Clark believes that given the mild inflation data in June, officials may feel comfortable choosing to keep interest rates unchanged for the time being.

She pointed out that if future data shows that the transmission of high energy prices to overall prices is limited and the unemployment rate continues to rise, policymakers may choose to extend the wait-and-see period for interest rates or even start to cut interest rates.

Regardless of the outcome, Fed Chairman Warsh's press conference after the interest rate decision this week will be closely watched for clues as to how he and his colleagues view the economy.

"I think that's the key thing that we need to figure out the most in the next few meetings - what's the position within the FOMC on the need to raise interest rates," said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities.

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