The US Federal Reserve is expected to leave interest rates unchanged when it announces its policy decision this week, even as policymakers continue to deal with inflation risks and rising oil prices linked to renewed tensions in the Middle East.
Though recent inflation data has given some relief, strong economic growth, a resilient labour market and higher energy prices have made the Fed’s next move less certain. Most economists and market participants now expect the central bank to stay on hold and wait for more data before making any changes.
Why the Fed is expected to hold rates
The Fed’s main job is to keep inflation under control while supporting maximum employment. Although inflation has eased from its recent highs, it remains above the central bank’s long-term target of 2%.
The latest consumer price index (CPI) report showed inflation slowed to 3.5% in June, helped by lower gasoline prices. Core inflation, which excludes food and energy, also cooled. However, the recent rise in oil prices after tensions in the Middle East has raised fresh concerns that inflation could remain stubborn.
Boston-based fund manager Nachiketa Sawrikar of the Rs 900 crore Artha Bharat Global Multiplier Fund expects the Fed to leave rates unchanged at this week’s meeting.
“We expect the Federal Reserve to leave interest rates unchanged at this week’s FOMC meeting while maintaining its wait-and-see approach,” he said.
Sawrikar also expects Fed Chair Kevin Warsh to stress that the central bank remains committed to bringing inflation back to its target while keeping future decisions dependent on incoming economic data.
“If inflation proves more persistent than anticipated, the Fed is likely to keep the option of further policy tightening on the table,” he said.
Markets see September as the next key meeting
Financial markets have also changed their expectations. According to CME Group’s FedWatch tool, traders now see little chance of a rate increase at this meeting and believe September is a more likely time for any policy change.
Some experts believe the Fed has room to wait because inflation has shown signs of cooling.
Wilmington Trust chief economist Luke Tilley said the recent decline in core inflation suggests price pressures could continue easing in the coming months, although higher oil prices remain a risk.
“It hasn’t yet,” Tilley told Yahoo Finance, referring to the impact of higher energy prices on inflation.
He believes the Fed’s next move will likely be a rate cut rather than a hike.
“If they hike [in July], I think they’re going to have to reverse it within six months,” Tilley said.
New York Fed President John Williams has also expressed confidence that inflation has peaked and is likely to move lower in the coming quarters, supporting the case for keeping rates steady.
Some officials still see the case for a hike
Not everyone is convinced inflation is under control. Some Fed officials worry that rising oil prices, fresh tariffs and continued demand for AI-related infrastructure could keep inflation above the Fed’s target for longer.
Former Kansas City Fed President Esther George said the decision remains difficult.
“The arguments you could create for them holding or raising seem pretty valid, but Kevin Warsh is not going to give you any tidbits to lead in the direction he wants to go,” George told Yahoo Finance.
“It wouldn’t surprise me if they hiked by 25 basis points at this meeting,” she added. “The two-year [Treasury yield] is higher than the fed funds rate, so that may be enough to move people, but I think September is more likely in this sense.”
Former Cleveland Fed President Loretta Mester also said policymakers should be ready to act if inflation stops improving.
“If inflation isn’t starting to move back down, or even if it starts to move back up because we don’t really know what’s going to happen with oil prices at this point, … I think they’ve got to take seriously that a recalibration may be the right thing to do,” Mester said.
George added that inflation has stayed above the Fed’s target for more than five years.
“You’ve got more than five years being above your target,” George said. “The chairman has made a lot of strong comments about inflation being a choice, and so how will he align that with action around today’s inflation?”
What the decision means for consumers
If the Fed keeps interest rates unchanged, borrowing costs are also expected to remain high. Credit card interest rates, which closely follow the Fed’s benchmark rate, are likely to stay elevated. According to LendingTree, the average interest rate on a new credit card offer is currently 23.79%.
“The average has been remarkably stable, remaining unchanged in three of the past four months,” said Matt Schulz, LendingTree’s chief credit analyst to CNBC.
At the same time, savings accounts and certificates of deposit (CDs) are expected to continue offering relatively attractive returns.
“It’s still a good time to save,” Schulz told CNBC. “CD and high-yield savings account rates are down from their peaks seen a few years ago, but they’re still strong by historical standards and are likely to remain that way for a while.”
Even if the Fed leaves rates unchanged this week, investors will closely watch Chair Kevin Warsh’s comments for clues about the path ahead.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor in the respective jurisdiction.