Cooler inflation data may force Warsh's divided Fed to hold the line on rates

Christopher Waller and Lisa Cook, both members of the Fed's Board of Governors, have recently said they would support rate hikes unless inflation cools soon, and the latest data suggests that scenario is unfolding. The Labor Department reported on Thursday that producer prices were unexpectedly unchanged on a month-over-month basis in July. One day earlier, it reported that consumer prices barely rose on a monthly basis in July, after falling in June. Those benign readings may not be enough to reassure those pushing for a rate increase. There is a particular concern that five years of above-target inflation may trigger rising inflation expectations — and make any future inflation battle harder and more costly to fix. "The question is, how quickly do we need to deliver on that 2% objective, and maybe we'd get there, but if it takes us another three or four years to get there — is that okay?" Cleveland Fed President Beth Hammack said on Thursday. Hammack was one of three policymakers who dissented against the Fed's decision last month to leave its policy rate unchanged in the 3.50%-3.75% range, preferring to raise it immediately. Two non-voting Fed bank presidents have since said they also wanted to raise rates. The Cleveland Fed chief pointed to a retailer in Cincinnati that is increasing prices "because they don't know where the next price pressure is going to come from, but they know it's coming from somewhere." "I think that we need to act now because I think we need to bring inflation back down to that 2% objective faster than what a longer-term glide path would say with interest rates at this level," Hammack said. Trump, meanwhile, continues to call for much lower interest rates and blames Warsh's "hostile" colleagues for blocking rate cuts. Warsh has remained mum about his plans, avoiding guidance of any sort. While there's little data showing the kind of weakness that would require the rate cuts Trump has envisioned, the case for a hike may also rest less on economic indicators and more on policymakers' sense of the risks around public expectations. The concern is that the longer the Fed allows inflation to remain above the 2% target, the more likely the public loses faith and starts acting as if inflation will remain high — a dynamic that can fuel price pressures and make the battle to curb them harder and more expensive. "The longer inflation is stuck here, the more likely it becomes embedded, which means that the disinflation doesn't materialize, which means the 2% target isn't credible, and restoring the 2% takes more work the more inflation is embedded," said Tim Duy, chief U.S. economist at SGH Macro Advisors. "The target is the actual lived expectations of the public," said Duy, who noted that ever-higher prices imposed pain on regular Americans. The alternative, however, is to impose a cost of a different sort through higher borrowing costs aimed at slowing economic activity and potentially boosting unemployment at a time when inflation may be drifting down anyway. "All Fed meetings in the near future will need to price in the possibility of a surprise, but we continue to think that the Fed will be able to narrowly avoid a hike amid a slow and gradual drift down towards target inflation, a cooling consumer sector, and a more precarious jobs outlook," said Christopher Hodge, chief U.S. economist at Natixis. "The current level of interest rates, many think, is still restrictive enough to bring inflation down," Richmond Fed President Thomas Barkin said on Thursday. He noted that much of the acceleration in inflation has come from shocks like higher tariffs, elevated oil prices and the artificial intelligence investment boom, factors that "should pass" at some point. The counterargument is that allowing inflation to remain too high for too long risks an upward shift in the price expectations of consumers and companies that becomes self-fulfilling. Barkin, however, said the tendency by financial markets and the public to focus on a recent slowdown in price pressures could ease the need to raise rates despite inflation having remained above the Fed's target for more than five years. "The more the headlines are 'inflation coming down,' I think that keeps expectations in check," he said. Markets have certainly reacted to those headlines, with traders dumping bets on a rate hike at the Fed's September 15-16 meeting after recent reports showing unexpected job losses and softer-than-expected consumer and producer price inflation in July. At the same time, investors are pricing in more than a 90% chance of a higher Fed policy rate by the end of the year, based on aggregated probabilities calculated on CME Group's FedWatch tool. Fed policymakers will update their own views with new projections issued after the meeting next month. As of the middle of June, the majority felt inflation, as gauged by the Personal Consumption Expenditures Price Index the Fed uses to set its target, would end 2027 somewhere between 2.2% and 2.5%. PCE hit 4.1% in May after three months of war-induced energy price increases but eased to 3.7% in June, the most current figure. To get to that end-2027 range, just half of Warsh's colleagues felt rates would need to rise by at least a quarter of a percentage point by the end of this year, and all but one of the rest felt no change would be appropriate. Kevin Warsh took over as head of the Federal Reserve in May with monetary policy at a crossroads, officials divided over whether they would need to hike interest rates to control inflation and President Donald Trump demanding lower rates to stimulate the economy. Recent data, however, may have set up the U.S. central bank for an extended do-nothing stance. The labor market is not booming. Wages have declined over the last six months on an inflation-adjusted basis and job growth has been tepid at best, but the 4.1% unemployment rate is historically low. Inflation — sent spiraling upward in the early months of 2026 by the U.S.-Israeli war with Iran — remains significantly above the Fed's 2% target. It has eased, however, in the last two months, undercutting arguments that it won't abate unless rates go up. With the economy not clearly tilting towards higher unemployment or rising inflation, the motivation for central bank policymakers to wait has only grown stronger.

Cooler inflation data may force Warsh's divided Fed to hold the line on rates

Hammack urges faster action as dissent grows

Trump presses for cuts as economists see a narrow path

Barkin says tariff, oil and AI-driven pressures should fade

Fed officials weigh cooler inflation against persistent expectations risk

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