Will the Fed raise interest rates this year? Divided economists weigh in
The central bank has held interest rates steady five consecutive times.
Federal Reserve Chair Kevin Warsh this week struck a combative tone about inflation, but the central bank opted against deploying its most powerful weapon: An interest rate hike.
"The path to central bank heaven means delivering on our remit," Warsh told reporters in Washington, D.C., on Wednesday afternoon. "This is the right team to win the battle against high inflation."
The remarks came minutes after the central bank issued its decision to hold interest rates steady for a fifth consecutive time, though pressure for a rate hike seemed to be building within its ranks.
Three of the 12 members on the Fed's policymaking board voted in favor of a rate hike, marking the largest number of dissenters casting ballots in the same direction since 2016.
After the announcement, economists appeared as divided as the policymakers, underscoring the uncertain prospects for a rate hike by the end of this year.
Some analysts told ABC News they expect a rate increase as soon as the Fed's next meeting in September, pointing to risks posed by price increases as global oil shortage shows little sign of letting up.
Others cast doubt on whether the Fed will raise rates at all over the remainder of 2026, noting an apparent willingness on the part of Warsh to let the market push borrowing costs higher without a nudge from the central bank.
"Uncertainty and volatility are a feature and not a bug," Joseph Brusuelas, global economist at RSM, said in a note to investors about Warsh's stated preference that investors respond to economic events rather than Fed policy statements.
"This has turned out to be anything but a boring and uneventful summer," Brusuelas added.
The Iran war triggered a historic oil shortage that drove up fuel costs and catapulted inflation to a three-year high in May, the same month Warsh took the helm of the central bank.
A preliminary peace agreement in June offered up some relief, but a burst of on-again, off-again fighting in recent weeks has caused crude prices to rise again.
Elevated price increases pose a challenge for central bankers eager to beat back price hikes. In theory, the Fed could raise interest rates in an effort to cool off prices, but the move risks a slowdown of hiring.
Fortunately, hiring has proven largely resilient, despite increased costs borne by shoppers and businesses.
Odds of a quarter-point rate hike at the Fed's next meeting in September stand at 63%, according to the CME Group's FedWatch Tool, a measure of investor sentiment. Odds of a rate hike by the end of the year stand at 83%.
"I do think we're going to see a rate hike. Maybe not at the next meeting but at some time in 2026," Rebel Cole, a professor of finance at Florida Atlantic University who formerly worked at the Federal Reserve, told ABC News. "Inflation won't come down until oil prices do. The Fed is boxed in."
Some economists, by contrast, questioned whether the Fed would raise interest rates over the remainder of the year.
The Fed holds little capacity to address inflation driven by supply shortages, such as the current oil shock, Brusuelas said. Higher interest rates would instead reduce demand as shoppers and businesses weather expensive borrowing costs. The Fed may instead expect inflation to fall once oil supply returns, Brusuelas said.
"We think that the nature of the supply shock and the Fed's tendency to look through such shocks implies that the Fed has the space to keep the policy rate on hold," Brusuelas added.
Warsh, meanwhile, has said he wants to let investors set the cost of borrowing in the market for short- and long-term bonds, instead of taking a strong hand himself through public statements or policy prescriptions.
In a sense, that approach has worked, some economists said. The 30-year Treasury yield hit its highest level since 2007 on Wednesday, after the Fed issued its rate decision.
The average interest rate on a 30-year fixed mortgage, which closely tracks the 10-year Treasury yield, stands at 6.66%, its highest level in a year, Freddie Mac data on Thursday showed.
"That market-delivered tightening is why the Fed could hold," Gordon Johnson, CEO and founder of data firm GLJ Research, told ABC News in a statement. "The market did the work; Warsh banked it."
A wide gap between the benchmark rate set by central bankers, the federal funds rate, and the market for Treasuries could pose challenges for policymakers, however. Investors may seek to exploit the gap, and economic tumult could result, Gerald Epstein, a professor of economics at the University of Massachusetts, Amherst, told ABC News.
"Eventually, the Fed would need to raise interest rates," Epstein said.
Too much focus on wonky economic questions risks overlooking the political dynamic surrounding interest rate policy, some economists said.
President Donald Trump pressured Warsh's predecessor, Jerome Powell, in an effort to reduce interest rates. The Department of Justice opened an unprecedented criminal probe into Powell, which he viewed as part and parcel of the pressure campaign. Trump has denied any involvement in the probe, which the DOJ later dropped.
Warsh has voiced support for the independence of the Fed, but he may seek to avoid rate increases even as he vows to fight inflation, especially as the political calendar barrels toward the November midterm elections, Epstein said.
"The elephant in the room is that the hawkish tone of the Fed chair is at odds with the preference of the White House for a rate cut," Brusuelas said.
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