Fed Faces Renewed Pressure Ahead of July Rate Decision

Federal Reserve officials are heading into the July 28-29 policy meeting confronting a resurgence of price pressures. A renewed Middle-East conflict has lifted oil prices, while a surge in artificial-intelligence-driven demand and new tariffs announced by the Trump administration add to inflationary risk. The combination makes the decision to hold or raise the federal funds rate a closely contested one.

Bloomberg

June’s consumer-price index showed the first decline in six years, driven by lower gasoline costs, which initially gave the Fed breathing room. That moderation was quickly offset when hostilities in the Middle East escalated, reviving concerns that energy-price shocks could re-ignite inflation. At the same time, robust AI investment and fresh tariffs on Canada and other trading partners have created a demand boom that policymakers see as a potential upward pressure on prices.

Bloomberg

• Federal-funds futures placed the probability of a rate hike at roughly 35 % before the CPI release, then fell to about 10 % after the July 14 Labor Department data showed the June CPI drop.

Bloomberg

• Investors at one point priced the odds of a hike at close to 40 %.

Bloomberg

• “Roughly one third of the banks we work with are positioning for further rate increases, while the rest are hedging against cuts,” noted a market-hedging executive.

Bloomberg

Fed Chairman Kevin Warsh reaffirmed the Fed’s commitment to price stability on Capitol Hill but offered no specifics on tool use. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have signaled support for modestly higher rates, citing inflation’s distance from the 2 % target. Former President Donald Trump criticized former Fed Chair Jerome Powell’s 2024 rate cut as a “political move,” suggesting a pre-midterm hike would be more appropriate.

Bloomberg

• “Things are definitely heating up in the conflict in the Middle East and, for oil, the risk of moving significantly higher from here has increased,” — Alex Payne, a senior portfolio manager at Vanguard

Bloomberg

• “It is clear listening to the Fed officials that you have a small group — like Logan, Hammack — who probably are ready to get going,” — Claudia Sahm, chief economist at New Century Advisors LLC

Bloomberg

• “Roughly one third of the banks we work with are positioning for further rate increases, while the rest are hedging against cuts,” — Pradeep Bhatia, chief executive officer of Derivative Path Inc

Bloomberg

• “Going in September or, God forbid, October – a first hike, right before the mid-terms – how’s that going to look? He might as well go now,” — Lavorgna. Lavorgna

Bloomberg

• “I think that’s the key thing that we need to learn over these next several meetings — about where the center of the committee is on whether or not rate hikes are needed,” — Matthew Luzzetti, chief US economist at Deutsche Bank Securities Inc

Bloomberg