Wall Street has a bad case of the jitters ahead of this week’s Federal Reserve decision, as central bankers debate the health of the economy and whether or not to raise interest rates.
Why all the worry? If they decide to hike rates, you could end up with higher credit card bills, auto loan payments or mortgage costs.
While it appears most likely that rates will remain unchanged, there are fears about the growing possibility the Fed might in fact raise rates to offset a fresh bout of inflation and rebounding oil prices.
Right now, market experts see a 70 percent chance that the Fed leaves rates alone, but that leaves a non-trivial 30 percent chance that the central bank’s rate setting committee could hike to offset the oil shock from the rekindled Iran conflict.
At the last Fed meeting in June, the committee left fed funds unchanged in a range of 3.50 percent to 3.75 percent, but at that time a group of Fed officials were also concerned that inflation and commodity prices would likely make a rate hike necessary later in 2026.
Adding to the uncertainty is new Fed boss Kevin Warsh, who is on the record saying that he believes the Fed should be more forward looking while relying less on past economic data.
‘Warsh has questioned whether traditional measures like CPI and PCE fully reflect today’s AI-driven economy, arguing policy should anticipate where inflation is headed rather than react to where it has been,’ Freedom Capital Markets chief market strategist Jay Woods told the Daily Mail.
Warsh has encouraged discussion and disagreement on the rate-setting committee, he even called it ‘family fighting’ – in a major shift away from the ‘data dependent’ Fed run by former Fed chair Jerome Powell.
New Federal Reserve boss Keven Warsh, who is on the record saying that he believes the Fed should be more forward looking while relying less on past economic data
Market experts see a 70 percent chance that the Fed leaves rates alone, but that leaves a non-trivial 30 percent chance that the central bank’s rate setting committee could hike
For years, that data dependence made Fed decisions something of a rubber stamp, since markets already had a good view of the numbers that the decisions were dependent upon. Investors focused more on the press conferences than the announcement itself.
But under Warsh, that dynamic has flipped, with investors now much less assured that they know what kind of decision will emerge from the meeting as Fed officials are now free to look beyond just the data.
‘That leaves policymakers balancing backward-looking inflation data against a fast-moving geopolitical backdrop,’ eToro US Investment Analyst, Bret Kenwell told the Daily Mail.
Recent inflation data has been concerning – the June Consumer Price Index rating released two weeks ago shocked the market with a 3.5 percent reading, the highest level in nearly three years – and there’s been a resurgence in US gasoline and commodity prices, all of which will put Warsh’s forward-thinking mantra to the test.
In a note to clients, Bank of America wrote that a July increase would be unprecedented: Since 1994, the Fed has never raised rates when market experts put the probability of a hike below 60 percent.
Bank of America said they do not expect a rate increase on Wednesday, although they cited rising oil prices and hot inflation as the main reasons for a potential hike.
‘In the near term, we expect conditions to keep the Fed holding rather than hiking,’ Vanguard senior US economist Josh Hirt told the Daily Mail.
If the Fed did hike, we will be in a new regime of monetary policy unpredictability, where more policy flexibility would also generate more policy surprises.
President Donald Trump said the Fed should lower interest rates and claimed that he knows what Warsh will do tomorrow
Since 1994, the Fed has never raised rates when market experts put the probability of a hike below 60 percent
Unsurprisingly, President Donald Trump said the Fed should lower interest rates, and claimed that he knows what Warsh will do tomorrow.
‘I know what he wants to do,’ Trump told reporters on the way to an event in Michigan on Monday, saying he 'wants to do the right thing.’
In a more telling comment, Trump claimed that Warsh is facing opposition from the Fed committee.
Last month, while no committee members voted to raise rates, meeting minutes showed that officials were sharply divided on whether the next move would need to be an increase.
That echoes market expert Jim Bianco’s view. According to Bianco, before Warsh Fed policy decisions very closely followed the expressed wishes of the Fed chair – the other 11 voter members of the committee were expected to go along with them.
Bianco wrote that’s no longer the case, warning that since Warsh has eliminated forward guidance and encouraged 'family fighting,' newly emancipated members might just outvote the chair.
Tomorrow will be a very telling Fed meeting, no matter what the outcome.