Federal Reserve Expected to Hold Interest Rates Steady as Inflation Keeps Prices High

WASHINGTON — Federal Reserve officials are growing increasingly frustrated with stubborn inflation, though that impatience may not translate into an immediate rate move this week.

As policymakers meet in Washington on Tuesday and Wednesday, the Fed is widely expected to leave its benchmark interest rate unchanged. The mood could shift by the central bank’s next gathering on Sept. 15-16, when officials may be more willing to act.

Inflation has remained above the Fed’s 2% goal for more than five years, keeping pressure on the central bank to respond. Earlier this month, new Fed Chair Kevin Warsh told Congress he had “no tolerance” for elevated inflation. This week’s meeting is the second policy session under his leadership.

BNP Paribas Securities analysts Joseph Egelhof and Guneet Dhingra said there is a chance Warsh’s Fed could “release the kraken” with a “shock rate hike” this week. Still, they view that as less likely, noting that policymakers may hesitate to unsettle financial markets that are not yet positioned for an increase.

Officials may also prefer to wait for fresh economic readings. On Thursday, the Commerce Department is scheduled to release its initial estimate of April-June economic growth, along with June data for the personal consumption expenditures price index, the Fed’s preferred inflation gauge.

Market expectations still point to no move this week. According to the CME FedWatch tool, just 29% of Wall Street traders expect a rate increase at the current meeting. By contrast, 76% now anticipate a hike in September, up from 59% a month ago.

“Policymakers’ patience with high and persistent inflation is broadly exhausted, meaning there is a significant risk” of a September rate hike, Egelhof and Dhingra wrote.

Adding another layer of uncertainty is the surge in violence in Iran. Oil prices briefly jumped above $100 a barrel last week as fighting intensified, before easing on hopes that the United States and Iran might find a path to reduce tensions.

Yet early Wednesday, Jordan intercepted missiles launched from Iran early just hours after the U.S. military said it knocked down another Iranian barrage launched against American forces in the Middle East, ending a brief pause in fighting.

After the U.S. and Israel attacks on Feb. 28, Iran shut down the Strait of Hormuz – through which a fifth of the world’s oil and natural gas pass. That caused the greatest disruption in oil supplies in history and sent energy prices surging. They’ve since bobbed up and down depending on the ever-changing state of the conflict and negotiations to de-escalate it, but the average cost for a barrel is $10 to $15 more today than it was at this point last year.

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Now Iranian-backed Houthi rebels from Yemen are attacking shipping in the Red Sea, attempting to stop tankers carrying Saudi Arabian oil from passing through the Bab el-Mandeb Strait.

The uncertainty puts the Fed’s inflation fighters in a bind.

“Sure, it is possible that the latest rise in prices is a transient blip that will reverse in a heartbeat. Then again, it seems equally that the war with Iran will get worse, that the Strait of Hormuz and Bab al-Mandab will remain blockaded for months or longer, and that energy prices will continue to trend up,” wrote Carl Weinberg, chief economist at High Frequency Economics.

“Should the (Fed) set monetary conditions on a hope that oil prices will reverse course and stay low … or should a central bank eschew wishful thinking and do its job of minimizing the probabilities that inflation will exceed target?”

Inflation has exceeded the Fed’s 2% target since early 2021 when the U.S. economy overheated as it roared back from COVID-19 lockdowns. Inflation peaked at just over 9% in mid-2022 and began to drop in the face of 11 rate hikes by the Fed in 2022 and 2023. But progress has more or less stalled.

Besides the Iran war, other factors adding to inflation pressure are President Donald Trump’s tariffs on foreign goods and a surge of investment in data centers to power artificial intelligence, which is driving up the cost of computer chips and equipment and electricity.

So-called core inflation – which excludes volatile food and energy prices – cooled in June, partly because apartment rents aren’t rising as fast as they had been. And a temporary drop in gasoline prices last month also helped contain overall inflation.

But several Fed policymakers have been arguing that the Fed will have to raise rates to return inflation to the 2% target.

“Sternly staring at inflation until it melts before our withering gaze is not an option,” Christopher Waller, an influential member of the Fed’s governing board, said in a speech this month.