Fed Officials Weigh Renewed Rate Hikes Amid Inflation Pressures

Pressure is mounting inside the Federal Reserve for another interest rate increase as officials weigh renewed inflation risks from the Middle East conflict. The decision to hold rates steady at a range of 3.5% to 3.75% in July was 'unusually fraught' with three regional bank presidents dissenting in favor of an increase, the first time in 10 years that three officials dissented in the same direction.

Half of the 18 Federal Open Markets Committee projected a rate increase would be necessary later this year, while the other nine projected no additional increases. Several Fed officials, including those who voted for the July pause, have warned in speeches and other appearances in recent weeks that they may be forced to raise rates if inflation doesn’t show sustained signs of slowing.

Recent inflation data has offered some encouragement, but there are questions over whether the improvement will last. The latest reading of the Fed’s preferred inflation index showed a slowdown in prices for June, falling to 3.7% from 4.1%, largely driven by a drop in energy prices with a break in fighting with Iran that dropped gas prices by nearly 50 cents a gallon.

The confluence of inflationary pressures appears to be testing the patience of officials who have argued the Fed may need to resume raising rates even as Fed chair Kevin Warsh has been hesitant to say whether hikes may be necessary. Markets have priced the odds of a quarter-point increase during the September meeting at more than 60%.