Next week's Federal Reserve meeting is shaping up as one of the least predictable in years. A renewed oil shock and a hawkish faction pressing to raise rates have collided with cooler inflation data that helps the case for a hold. Presiding over it is a new chairman who has revealed nothing about which way he leans.
Warsh has vowed repeatedly over the last two months to restore price stability, to disabuse investors of the idea the Fed has implicitly accepted higher inflation. He hasn't spelled out how current interest rates will accomplish that.
The officials pressing to raise rates are the more insistent, and a few of them are candidates to dissent if rates stay on hold. Some influential policymakers last week suggested they were inclined to hold, but could support tighter policy later this year. A hold would thus potentially settle little by pushing the debate to September.
At the Fed's meeting last month, half of Warsh's 18 colleagues expected they would need to raise rates this year. The other half thought they wouldn't. Warsh "could tip the balance of the scale in whichever way he wants," said Jonathan Pingle, chief U.S. economist at UBS.
On Wednesday, futures markets put the chance of a rate increase at roughly one in three when the Fed meets July 28-29, up from about one in 10 late last week, according to CME Group. The jump tracked a renewed run-up in energy prices as conflict has flared again in the Middle East.
"I can make a good case for either raising rates or not," said William English, a former senior Fed economist now at Yale. The deciding factor, he said, is largely out of the Fed's hands: whether the Iran conflict eases and oil falls back, or worsens and leaves the Fed with a more stubborn inflation problem. If the Iran situation pushes prices up, "they'll wish they raised rates," he said. "They're just kind of stuck."
The case for waiting
The case for waiting rests on recent economic data: Energy prices declined in June, and underlying prices were flat in the consumer-price index. The June employment report gave no sign of a tight labor market pushing prices higher.
"The data have been more favorable than what the Fed had in front of them in June," said Dean Maki, chief economist at hedge fund Point72 Asset Management. "It would be strange for the Fed to respond to that set of data by hiking when it chose not to in June."
Officials who are more patient argue that this year's inflation has been driven by a series of one-off shocks -- first, tariffs, and later, higher energy prices from the war with Iran -- that a central bank is supposed to look through rather than fight with interest rates. Some point to signs that the impulse from tariffs on imported goods prices has finally run its course.
"There are encouraging reasons to expect that inflation has peaked and should edge down in coming quarters," New York Fed President John Williams said last week.
Earlier this month, Warsh cited falling bond yields and inflation expectations as evidence that markets already grasp his resolve on inflation. A big driver of those moves was President Trump's truce with Iran. Yields have turned higher this week as fighting resumed and oil prices climbed.
The case for hiking
A growing number of officials worry their interest-rate setting, at 3.5% to 3.75%, is too low for an economy that keeps defying fears of a slowdown, with inflation still above its 2% target and new price shocks in play. Officials looked through the first Iran-related energy-price surge this spring, but may find a second one harder to dismiss. They have also pointed to the AI-related price increases as driven by demand that interest rates can restrain, unlike tariffs or oil.
Even after stripping out one-off shocks, they argue, underlying inflation has been stuck near 2.5% for roughly a year -- a sign the current setting isn't restrictive enough. Lofty stock markets and easy borrowing conditions for companies suggest the economy could absorb higher rates without much difficulty. "Better modest restriction now than severe restriction later," said Dallas Fed President Lorie Logan in a speech last week.
A hike would let Warsh define his chairmanship on his own terms. Raising rates over a president who has demanded lower ones would dispatch the idea, pressed by Democrats during his confirmation, that he is Trump's "sock puppet." Delivering on his vow before the rest of the committee forces the issue would show him leading it rather than trailing it. "One hike gets you more than you might think for your reputation when you are new to the job," said Marc Sumerlin of Evenflow Macro.
Several Fed officials who last week suggested they wouldn't push for a July hike -- including governors Lisa Cook, Christopher Waller, and Philip Jefferson -- have said one will become harder to postpone if the inflation outlook doesn't improve.
Reading the chairman
Some officials willing to hold steady next week may genuinely think a hike is unneeded, or they might simply be reluctant to force the hand of a chairman who hasn't shown it. "Right now the data's moving in his direction, where he can probably sit tight and buy time," said Michael Gapen, chief U.S. economist at Morgan Stanley. "But the economy doesn't always allow you to buy time."
The White House has cast pressure to raise rates as coming from Warsh's opponents, so an increase could look like a chairman overrun by his committee. Trump this month said the board is "a little bit hostile" toward Warsh.
In the absence of guidance from Warsh, investors have taken their cues from wherever they can find them. A speech by Waller this month pushed pricing toward a July increase before the June inflation report pulled it back. Subsequent remarks from Williams and Jefferson reinforced expectations of a hold.
Warsh, Williams and Jefferson form the Fed's policy steering group, known internally as the troika. Under Warsh's predecessor, Jerome Powell, the two vice chairs helped build support for a policy proposal they workshopped ahead of the meeting, giving markets a read on their thinking. The troika has continued to meet under Warsh, but he has said he wants "messier meetings" whose outcomes aren't settled in advance. Heading into the premeeting quiet period last weekend, some of Warsh's colleagues weren't sure where he stood.
Many investors tend to hear what they already believe, said Gapen. To some, Warsh is a hawk in dove's clothing -- installed by a president who wants lower rates but, in their view, an old-school monetarist at heart who won't let inflation fester. Others see the opposite: a dove in hawk's clothing, talking tough on price stability while waiting for an AI-driven productivity boom to bring inflation down on its own, in no rush to provoke an unnecessary fight with the White House.
"I'm not convinced he can get away with that forever," said Gapen.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
July 23, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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