MNI FED WATCH: Hold For Now, Edging Closer To Rate Increases

A pause in U.S. strikes against Iran over the weekend likely cements the Federal Reserve's decision to stay on hold at its July meeting, but it won't take much more than one hot inflation report to trigger a hiking cycle as soon as September. (See MNI INTERVIEW: Fed To Consider Hike in Sept - Lockhart)

The growing number of FOMC members expressing impatience with the persistence of inflation, which has been above the 2% target for over five years and moving in the wrong direction for most of 2026, is expected to result in at least one dissent in favor of immediate tightening. Traders are pricing in a one-in-three chance of a hike this week. (See MNI INTERVIEW: Fed Hike Plausible As Early As July - George)

Robust AI-related demand, the conflict in the Middle East and tariffs are responsible for the hawkish tilt, with headline and core PCE inflation expected to read 3.7% and 3.3% respectively for June, according to the Cleveland Fed Nowcast. But the tame CPI reading for June staves off hikes for now. (See MNI POLICY: Fed Inclined To Hike Despite CPI Breathing Room)

Helping the case, global oil prices retreated to under USD90 a barrel after the U.S. and Iran refrained from attacking each other for a third straight night Sunday, though tensions are still elevated as shipping through the Strait of Hormuz remain restricted. (See MNI INTERVIEW: Ex-Fed's Bullard Sees Several Rate Hikes Ahead)

WARSH'S REACTION

Almost all policymakers said at their last meeting that some policy firming would be warranted should inflation remain elevated. Nine of 18 officials in June penciled in at least one hike by year-end, and voting Fed presidents Beth Hammack, Lorie Logan and Neel Kashkari could dissent on a hold. (See MNI INTERVIEW: Fed Prepares To Hike On Sticky Inflation-Mester)

The greater mystery is where Chairman Kevin Warsh stands on the rate decision. Through two days of testimony to Congress this month, Warsh refused to offer details on his outlook on the economy or his reaction function, instead reiterating the Fed’s
resolve to achieve price stability. (See MNI INTERVIEW: Fed Will Be On Hold As Oil Shock Unwinds- Levy)

Supply-led inflation may not necessarily be inflationary, still it's up to the Fed to control inflation in the medium term, he told lawmakers. (See MNI INTERVIEW: Fed Will Look Through Inflation And Hold -Miran)

Both the oil price shock and tariffs so far have not engendered worrisome second-round effects. At the ECB conference in Sintra on July 1, as oil prices were coming down after a preliminary peace agreement with Iran, Warsh said, “expectations of inflation over the first four weeks of this period, they've come down. Inflation risks have come down again.” (See MNI INTERVIEW: Fed Could Be Easing Before Year-End-Kroszner)

TASK FORCES

Now underway after Warsh announced the formation of five task forces at his first press conference is a wide-ranging external review of how the FOMC conducts monetary policy. 

A panel of prominent scholars, business leaders and central bankers will start briefing the committee as early as September, with conclusions due by the end of 2026. The FOMC as a group will decide if any changes will be adopted. (See MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn)

The most significant reforms are expected to come in communications and the balance sheet, with revisions to the Summary of Economic Projections and a smaller portfolio. But the notion of relying more on novel data sources or revisiting the inflation framework will likely face stronger resistance. (See MNI POLICY: Warsh Task Forces Will Need To Woo FOMC Skeptics)