WASHINGTON — Federal Reserve Chairman Kevin Warsh has made a point of keeping quiet about where interest rates are headed, but that approach is facing serious headwinds as oil prices climb, new tariffs loom, and a growing number of his colleagues are openly pushing for a rate increase.
When the Fed’s policymakers convene July 28-29, they are widely expected to leave the central bank’s benchmark interest rate unchanged in the 3.50%-to-3.75% range, where it has sat since December. But building consensus may prove difficult for Warsh, given rising energy costs, President Donald Trump’s push for additional tariffs, and colleagues who are already signaling they want to act.
Fed officials have grown increasingly impatient after more than five years of inflation running above the central bank’s 2% target and inflation-adjusted incomes declining. Warsh has described the Fed’s stance as having “no tolerance” for persistent inflation — but some colleagues say that talk alone isn’t enough.
In testimony before Congress last week, Warsh acknowledged inflation remains too high, but offered little more than a vague commitment to reviewing the Fed’s “tools” and considering whether policy adjustments were needed. Others on the Fed have been far less restrained.
Fed Governor Christopher Waller pushed back on Warsh’s low-key approach earlier this month, saying, “Sternly staring at inflation until it melts before our withering gaze is not an option.” Waller, who had been considered for the Fed chair position that Trump ultimately awarded to Warsh, also warned that seemingly stable inflation expectations are no reason for complacency. “It does not mean we can be lackadaisical” about raising rates before expectations begin to spiral, he said.
The Fed’s meeting will wrap up with a policy decision announced at 2 p.m. EDT on Wednesday, July 29.
The current inflation battle echoes the pandemic era, when the Personal Consumption Expenditures price index — the Fed’s preferred inflation gauge — surged past 7% in June 2022. That spike triggered one of the fastest series of rate hikes in the Fed’s history. Warsh has previously criticized the Fed’s slow response at that time as a mistake and pledged not to repeat it. Inflation did eventually cool and was approaching the 2% goal throughout 2024.
But despite Trump’s 2024 campaign pledge to bring down prices, inflation has been creeping back up over the past 18 months, driven by tariffs and rising energy costs.
Some Fed officials had hoped those pressures were fading, giving Warsh justification to hold off on rate hikes and avoid making specific forward-looking statements about policy. But that reasoning may be running out of runway as support for a rate increase builds among his colleagues.
As of May, the PCE index showed prices rising at a 4% annual rate — double the Fed’s target and notably higher than in recent months.
A fresh spike in oil prices tied to renewed Middle East conflict, combined with new tariff threats from Trump, has reversed trends that were expected to ease inflation. Analysts warn this could further erode public confidence in the Fed’s commitment to price stability.
Waller is far from alone in his hawkish stance. Other Fed governors have signaled readiness to raise rates if inflation doesn’t come down soon, and regional Federal Reserve Bank presidents have struck an even more aggressive tone.
Cleveland Fed President Beth Hammack, in her last public remarks before the upcoming meeting, said business leaders in her district are actually urging her to raise rates — an unusual reversal from the typical preference for lower borrowing costs.
“For the first time in my tenure, I’m hearing from businesses who say they think we need to take action to curb inflation, and from consumers who can’t make ends meet, about a growing sense of despair,” Hammack wrote on LinkedIn.
A quarterly Fed survey of corporate finance executives released in June showed inflation had jumped to the top concern among businesses — up from sixth place in the prior survey, where it had ranked behind issues like trade policy and workforce quality. Companies that had been absorbing higher energy and input costs said they were now beginning to pass those costs on to customers through price increases.
The Fed’s July Beige Book — a collection of economic observations from around the country — also pointed to a pipeline of price increases, driven by both wage growth and a broader adjustment to a higher-price environment.
“A Memphis-area firm observed that vendors are increasingly adding inflation-indexed price adjustments to their service contracts, a practice that was previously uncommon,” the St. Louis Federal Reserve reported.
Recent research from JPMorgan and Goldman Sachs reinforced concerns that inflation is no longer limited to energy prices or tariff-affected goods. Goldman Sachs economist Jessica Rindels estimated that as of June, nearly 60% of PCE index categories were seeing prices rise at annual rates above 3%. While that’s below the roughly 80% seen during the height of the COVID-19 pandemic, it’s well above the 37% average recorded between 1990 and 2019, when inflation was generally stable.
The Fed formally adopted its 2% inflation target in 2012, and for nearly a decade — including the early months of the pandemic — inflation consistently fell short of that goal. By February 2021, the PCE index was more than 5% below where it would have been had the Fed consistently hit its target.
The price increases since then have more than wiped out that gap. The index now sits roughly 5.5% above where it would be had the Fed met its goal all along — a gap that has eaten into purchasing power across the economy.
A rate hike is not yet certain. Gasoline prices have climbed back to $4 a gallon, coinciding with the peak summer travel season, and additional tariff threats could bring another wave of rising import costs. Still, Goldman economist Rindels and others believe the breadth of price pressures should begin to narrow by year-end.
That means the next several months of inflation data will be critical — and will put Warsh’s no-guidance strategy to the test as his colleagues watch the numbers and grow increasingly restless.
“There is a growing sense of frustration with inflation,” said Dario Perkins, managing director of global macro at TS Lombard. “After six years of overshooting their target, people are starting to ask difficult questions about ‘credibility.’ The Fed’s plausible deniability is gone. There is no tolerance for further misses.”
