Hike or hold? Fed chief Kevin Warsh has markets unsure on rates

The US Federal Reserve is expected to hold interest rates steady when it concludes its two-day meeting on July 29, but market participants are eyeing the possibility of a surprise hike as patience with high inflation wears thin.

Fed officials have kept rates on hold in 2026 as they wait for temporary price pressures from tariffs and the war in Iran to wane. Concern is mounting, however, that inflation will not reach the Fed’s 2 per cent target unless higher rates are used to rein in demand.

The market’s uncertainty can be pinned squarely on chairman Kevin Warsh, who has eschewed the past practice of giving signals on the future path of rates. The new Fed chief has said he is committed to lowering inflation, but has not indicated whether he supports increasing interest rates to do so.

“Regardless of what you think they’re going to do, and what they end up doing, this is a great example of the fact that we’re in a new era,” said Stephen Stanley, chief US economist at Santander US Capital Markets.

“We’re actually going into the meeting with legitimate uncertainty. While I have them holding off in July, I think there’s certainly a non-trivial chance that they go.”

The Fed will release a post-meeting statement at 2pm on July 29 in Washington (2am on July 30, Singapore time), and Warsh is scheduled to hold his second post-meeting press conference 30 minutes later.

He is likely to face a range of questions on the economy and rates, as well as his plans for enacting broader changes at the central bank.

The Fed will not release economic forecasts and rate projections at this meeting.

Hawkish influence

Fed officials have been in a holding pattern since cutting rates at each of the last three meetings in 2025.

But, from January to June, their outlook for rates has seen a significant shift as the labour market stabilised and the downward trend in underlying inflation stalled.

First, an increasing number of Fed officials supported removing a bias towards lower rates in the post-meeting policy statement.

Then rate projections released in June showed nine policymakers thought that at least one rate hike would be necessary in 2026. And that has not been driven simply by the impact of the Iran war on oil prices.

Governor Christopher Waller – who earlier in 2026 was more concerned about weakness in the labour market – has said in recent months that price pressures are broadening now. He floated the possibility of a rate increase in the near future. Several other Fed officials have echoed that sentiment.

With Warsh refusing to reveal his own views, uncertainty about what the Fed might do at this meeting has increased.

The probability of a hike implied by federal funds futures reached as high as 40 per cent in the run-up to the meeting. As at the afternoon of July 28, investors saw about a 35 per cent chance, a rare level of uncertainty on the eve of a Fed meeting.

A hike would bolster Warsh’s credibility, said Derek Tang, an economist at Monetary Policy Analytics. It would show he is serious about his repeated pledge to restore price stability, Tang added.

Leaving rates unchanged risks cementing an “all hat and no cattle” reputation, he said.

Still, a surprisingly benign report on consumer prices in June will help make the case for holding off on a rate increase at this meeting. Warsh may argue that officials need more time to assess where inflation is heading.

If that is the outcome, Fed watchers will be on the lookout for clues on how close the centre of the Federal Open Market Committee came to supporting an increase.

The rising anxiety about inflation could also mean that some Fed officials dissent. Top candidates include Dallas Fed president Lorie Logan and Cleveland Fed president Beth Hammack. BLOOMBERG