What to Expect from the July Fed Meeting

Key Takeaways

• June inflation and employment data strengthened the case for the Federal Reserve to leave rates unchanged at its July meeting even as a renewed jump in oil prices threatens to reignite upward price pressures.
• Markets increasingly expect the Fed under Kevin Warsh to maintain a hawkish stance, with additional rate increases possible later this year.
• Analysts expect Warsh to provide only minimal color on the discussion among Fed officials, and no forward guidance on rates.

The Federal Reserve looks poised to leave interest rates unchanged at its July meeting this week, even as inflationary headwinds could compel the central bank to raise rates later this year.

Despite the potential for significant debate at the meeting over the challenging inflation outlook, analysts say that under new Fed Chair Kevin Warsh, investors should not expect much information beyond a bare-bones official statement.

The Fed meeting comes as the latest data showed that both consumer price gains and job growth were unexpectedly tame in June, leading economists to predict that the Fed will hold at this month’s Federal Open Market Committee meeting.

At the same time, analysts say that resumed Middle East hostilities, increasing tariffs, and the artificial intelligence buildout suggest upside risks to inflation, creating problems for the Fed and hinting at tightening this year. That backdrop has bond futures traders betting that a rate hike isn’t completely off the table, with the odds of a quarter-point increase approaching 40% on Friday.

But most economists don’t see the Fed making a move this time around.

Nancy Vanden Houten, Oxford Economics lead economist, is in that camp. However, “I expect [Warsh] will acknowledge recent better-than-expected inflation data, while acknowledging the upside risk to inflation from the renewed hostilities between the US and Iran.”

Inflation Worries Persist

“The assumption we had going into June was inflation would be transitory, and the June data was consistent with that,” says Don Rissmiller, chief economist at Baird Strategas. Trouble is, conditions suggest that future data will “go the other way,” he adds, factoring in the Middle East conflict, renewed tariffs, and labor supply issues. President Donald Trump is expected to impose fresh import taxes, as 10% global levies from February are expiring. For example, the administration is set to impose 50% tariffs on certain Canadian goods in 30 days.

One concern is that the Personal Consumption Expenditures Price Index - the Fed’s preferred measure of inflation - remains elevated.

The PCE “remains well above the Fed’s 2% target,” writes strategist Ed Yardeni of Yardeni Research. On top of tariffs and the inflationary headwind of energy, “the AI buildout has created significant demand for electronic components such as memory chips, servers, and networking equipment,” creating inflation.

This month, Fed governor Christopher Waller said the central bank may need to raise interest rates “in the near term” if coming data shows inflation still well above the 2% target. He said that monetary policy is at a “crossroads,” and that the Fed should not be “lackadaisical.” He added: “There is still a credible case for inflation to begin to fall back to our 2% goal with policy at its current setting. But I am concerned about the equally plausible case that data in the coming weeks will show ⁠that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.”

The US economy added just 57,000 jobs in June, well below consensus estimates, even though the labor force participation rate is at a five-year low. And consumer prices rose by a smaller-than-expected 3.5% in June from a year ago, down from a 4.2% increase in May. Core CPI, which excludes volatile food and energy costs, also lagged the May increase.

Fed’s Warsh to Congress: Mission Not Accomplished

Warsh “has come in hawkish in his rhetoric,” says Chris Zaccarelli, chief investment officer of Northlight Asset Management. This month, Warsh told Congress that FOMC members “have no tolerance for persistently elevated inflation,” and he criticized the Fed for letting inflation run above its 2% target for five years. “There might be some who look at this morning’s data and say, ‘Well, mission accomplished, everything is swell.’ That is not my view,” he said.

As of Friday 62% of market participants expected the Fed to maintain its current target range of 3.50%-3.75% at its July 29 meeting, with the remaining expecting a hike to the 3.75%-4.00% range, according to the CME FedWatch Tool.

By the Fed’s December meeting, roughly 40% of market participants expect two quarter-point rate hikes, bringing the target rate to 4.00%-4.25%. Remaining market views are split, with 32% expecting just one hike and 18% expecting three.

Strategas’ Rissmiller falls on the tighter side: “If the hawkish case wins over the next six months, then three hikes will be your starting point.”

Economists caution that Warsh has made it clear he won’t be offering guidance about what the Fed might be doing down the road. In addition, he may also keep his discussion about this week’s meeting vague.

“At the last post-meeting press conference, Chair Warsh indicated he would not be giving forward guidance. As mentioned above, that is not controversial,” JP Morgan chief US economist Michael Feroli wrote last week. “More unusual was that he didn’t explain the Committee’s thought process for the decision made earlier that day, saying, ‘I’ve got nothing more to say than the statement itself.’ He also eluded any extended discussions on economic developments. His subsequent remarks in Congress four weeks later suggest this will continue to be his style.”