Fed Holds Fire on Rate Hike Despite Frustration Over High Inflation

The Federal Reserve is expected to keep its benchmark interest rate unchanged at this week's meeting in Washington. Despite growing frustration over high inflation, policymakers may not be ready to take action just yet.

According to Fed watchers Joseph Egelhof and Guneet Dhingra at BNP Paribas Securities, it's possible that the central bank will 'release the kraken' with a 'shock rate hike', but more likely they will hold off from disrupting financial markets. Only 29% of Wall Street traders predict a rate increase this week, while 76% foresee one in September.

The uncertainty surrounding Iran's conflict and its impact on oil prices is casting a shadow over the Fed's decision-making process. With energy prices $10 to $15 higher than last year, policymakers are weighing whether to act now or wait for more economic data. The Commerce Department will release new figures on Thursday, including the personal consumption expenditures (PCE) price index for June.

Several Fed policymakers have been arguing that the Fed will have to raise rates to return inflation to the 2% target. Christopher Waller, a member of the Fed's governing board, has said 'sternly staring at inflation until it melts before our withering gaze is not an option'. With inflation stuck above the target for over five years, the pressure on the Fed is mounting.