New Federal Reserve Chair Kevin Warsh is entering his second meeting with investors split...
Inflation accelerated earlier this year after the U.S. began a war with Iran. That revived concerns that the Fed may have to hike rates.
Meanwhile, President Donald Trump – who hand-selected Warsh – is still pushing for lower rates.
Investors have been left trying to decide which force will win. And that uncertainty has made every economic data point feel more important.
One part of the market expects the Fed to raise rates again. Another still sees room for cuts before the end of the year.
Warsh has kept both camps from getting too comfortable. He held rates steady at his first Federal Open Market Committee ("FOMC") meeting in June. And he avoided committing the Fed to a fixed path.
The next FOMC meeting kicks off tomorrow... with the Fed set to announce its rate decision on Wednesday.
And as we'll explain, we don't expect rates to change this time around, either...
The Fed has two primary 'mandates'...
The first is inflation, which policymakers aim to keep near 2% over the long term. That's enough to let the economy grow without straining folks too much.
Inflation tends to rise when the economy is running "hot"... in which case, the FOMC wants to slow down the economy. Higher interest rates cool the economy by making purchases like mortgages, auto loans, credit cards, and business investments more expensive.
The Fed's second mandate is "full employment." Policymakers want the economy strong enough to support job creation and rising wages.
Economists often place full employment somewhere between an unemployment range of 4% to 6%, although the Fed uses no fixed target. Lower interest rates can support hiring by reducing borrowing costs and encouraging companies to invest.
Those goals regularly pull the Fed in opposite directions.
A rate increase can slow inflation while putting pressure on hiring. A rate cut can strengthen employment while risking higher inflation.
That is why one weak employment report or a few strong inflation readings shouldn't cause the Fed to jump the gun. It has to judge the long-term direction of the economy, rather than react to every monthly swing.
The pressure for a hike seems to be fading...
As we mentioned, the balance appeared to tilt toward higher rates earlier this year.
Inflation was heating up while the labor market remained firm. The unemployment rate peaked around 4.5% in November... and improved to 4.2% by June.
That gave the Fed little reason to worry about an immediate collapse in employment.
Some investors expected Warsh to raise rates at his first meeting in June, since inflation surged to 4.2% in May. He held the policy rate at 3.5% to 3.75% instead.
And the latest data suggests Warsh was right to wait...
In June, consumer prices fell for the first time in six years. Energy prices finally started cooling down.
The Fed prefers to watch this data through the personal consumption expenditures ("PCE") price index. The official June release arrives later this week, although most of the underlying components are already available.
PCE inflation is expected to drop to 3.7%, down from 4.1% in May. Excluding energy and food, it's expected to be just 3.3%.
So the main metric the Fed cares about is down to its lowest level of the year. The "wait and see" strategy seems to be working.
Demand is cooling gradually. And inflation is moving lower without a sharp deterioration in employment.
Warsh has enough evidence to avoid another rate hike this week...
Employment remains stable. Inflation is still above the target... but its recent trend suggests patience might be the right strategy.
Warsh has already signaled that he wants the Fed to reveal less about its future decisions. That approach can frustrate investors searching for guidance, but it keeps markets from treating projections as promises.
Right now, the strongest rate decision is no change at all.
The Fed can wait for several more months of inflation and employment data before committing to its next move. That should help ground investors and prevent market panic.
Regards,
Joel Litman
July 27, 2026
