WASHINGTON — The Federal Reserve is wrapping up a two-day policy meeting this week, but analysts say the chances of an interest rate hike are lower than what rate futures markets currently suggest — even as those markets have been pricing in a growing possibility of a move.
Heading into the July 28-29 gathering — only the second policy meeting chaired by Fed Chairman Kevin Warsh — the central bank has kept its benchmark interest rate steady in the 3.50% to 3.75% range since December. Speculation about a potential hike had been building due to rising energy prices and hawkish signals from several of Warsh’s colleagues on the policy committee.
However, history suggests the Fed rarely raises rates just once. When the central bank shifts direction after a prolonged pause, it tends to follow through with additional moves over several meetings. That pattern may be giving policymakers pause about pulling the trigger now.
James Bullard, who led the St. Louis Fed from 2008 to 2023 and now serves as dean of the Mitch Daniels School of Business at Purdue University, explained the dilemma. “They don’t usually do a one-and-done, so it really means … the (policy) committee has to decide whether they’re going to commit to a sequence of rate increases,” he said. “I don’t think they’re ready to do that at this meeting.”
At the Fed’s previous meeting on June 16-17 — Warsh’s first as chairman — all 18 of his fellow policymakers agreed to leave borrowing costs unchanged, even though a handful already saw justification for a hike at that time.
Since then, the argument for raising rates has softened somewhat. Consumer prices climbed 3.5% in June compared to a year ago, according to the Bureau of Labor Statistics — still elevated, but down from 4.2% in May, partly because a U.S.-Iran ceasefire helped push fuel costs lower. Core inflation, which strips out volatile food and energy prices, also eased, with the core Consumer Price Index falling to 2.6% from 2.9%. The head of the New York Fed expressed confidence earlier this month that this downward trend would continue.
On the jobs front, the labor market has held up. Nonfarm payrolls grew by 57,000 in June — a sharp slowdown, but still above the level economists consider necessary to keep pace with workforce growth. The unemployment rate edged down to 4.2%, and hourly wages rose 3.5% year-over-year, a pace that analysts say does not appear to be fueling inflation.
Warsh has largely kept his own rate outlook private, but has indicated he believes gains in productivity could allow the economy to grow faster without triggering stronger price pressures.
Despite the recent cooling, the reasons that led roughly half of the Fed’s policymakers in June to anticipate higher rates by year’s end have not gone away. Inflation has exceeded the Fed’s 2% target for more than five years and picked up speed in the first half of this year. Oil prices surged again this month after the Middle East ceasefire broke down, reigniting inflation worries. Some economists and Fed officials are concerned that price pressures are spreading beyond fuel and groceries, particularly as demand driven by artificial intelligence investment heats up parts of the economy.
The Fed is scheduled to announce its decision at 2 p.m. Eastern time on Wednesday. Most economists anticipate the central bank will hold rates steady but expect at least one — and possibly as many as three — policymakers to dissent in favor of a hike, potentially setting the stage for rate increases to begin in September if inflation does not improve meaningfully before then.
“September remains our base case for the first hike,” analysts at Capital Economics wrote last week. “By then, the Fed should have greater evidence that strong goods price pressures are not fading, despite the easing of tariff effects. Moreover, a September hike is now fully priced into markets, which Warsh has stressed will be an important steer for policy decisions under his chairmanship.”
Not everyone agrees the Fed should wait. Analysts at Wrightson ICAP argued there is a case for acting now, particularly given Warsh’s stated commitment to fighting inflation. “We doubt Warsh would face widespread opposition if he argued for tightening. The final decision could go either way, but we think the Fed is more likely to raise rates by 25 basis points on Wednesday than to stand pat,” they wrote.
A standalone rate hike — one not followed by additional increases — is historically uncommon. The last time the Fed raised rates without quickly following up was in 2015, though policymakers at the time repeatedly signaled their intent to continue normalizing rates after years of near-zero borrowing costs. It ultimately took a full year before the economy was deemed strong enough to handle further increases.
The clearest exception in modern history came in March 1997, the only rate adjustment in recent decades that was surrounded by moves in the opposite direction. Transcripts from that meeting reveal that then-Fed Chairman Alan Greenspan believed “the odds are better than 50/50” the Fed would raise rates again, but he preferred that markets not assume that outcome — an unusual step that led to a formal announcement of the move.
Subsequent meeting minutes that year noted a “firming” bias, but inflation never rose sharply enough to force the Fed’s hand. Eventually, Russia’s debt default and the near-collapse of a major U.S. hedge fund prompted a series of rate cuts beginning in September 1998.
With markets currently pricing roughly a one-in-three chance of a hike this week, analysts at Bank of America urged investors to think beyond any single meeting. “The real discussion is whether the Fed will start a proper hiking cycle, which is typically delivered through at least three hikes, or not hiking at all,” they wrote.
