Inflation Battle Rekindled, Chair's Stance Remains a Mystery—Why Is Next Week's Fed Meeting Shaping Up as the “Most Suspenseful Script”?

Next week, the Federal Reserve will hold one of the most unpredictable monetary policy meetings in recent years. This is not just a routine rate adjustment, but an intense tug-of-war between multiple conflicting forces. On one hand, renewed conflict in the Middle East has triggered a spike in oil prices, reviving inflation fears; on the other hand, the latest consumer price data turned out to be unexpectedly mild, providing support for a “hold steady” approach. Adding more uncertainty, presiding over the meeting is a relatively new Chair—Kevin Walsh—who has yet to clearly reveal his policy leanings to the market or his colleagues. On such a complex chessboard, both a 25 basis point hike and keeping rates unchanged seem to have sufficient and reasonable arguments. Ultimately, which way the scales tip depends not only on the economic data, but also on how the new leader chooses to define his authority and the tone of his tenure.

The Case for “Holding Steady”: Improving Data and the Logic of One-Off Shocks

Officials advocating for maintaining the current 3.5%-3.75% rate range hold two strong cards.

The first card comes from recent economic data itself. Energy prices saw a temporary pullback in June, and the core consumer price index was essentially flat, not continuing its previous upward slope. Meanwhile, the June jobs report failed to capture any systemic evidence of a tight labor market driving up wages and prices. Dean Maki, chief economist at hedge fund Point72, pointed out that the data landscape the Fed now faces is actually more favorable than during the June meeting. Since June’s data didn’t trigger a hike, rushing to raise rates when faced with even softer data would clearly be illogical. The second card is the analysis of inflation’s causes. The patient officials believe that this year’s rising prices are essentially the result of a series of one-off external shocks—initially, tariffs pushing up import prices, followed by surging energy costs from the Iran war. These shocks are sudden and temporary; monetary policy should not overreact, but rather “look through” them. Encouragingly, the inflationary effect of tariffs on imports has begun to fade. New York Federal Reserve Bank President John Williams even recently stated there’s ample reason to expect inflation has peaked and will moderate over the coming quarters. Additionally, Chair Walsh himself noted earlier this month that the market has gotten his message of determination to fight inflation, evidenced by falling long-term bond yields and subdued inflation expectations—though this benefit has been partially offset by the recent rebound in oil prices after renewed Middle East conflict.

The Case for “Preemptive Rate Hikes”: Overheating, Secondary Shocks, and the Chairman’s Bid for Authority

However, the other side of the scale also carries weighty pressures that are becoming even heavier over time.

First, the U.S. economy appears far from needing “easing.” Despite rates climbing above 3.5%, economic growth keeps outpacing slowdown forecasts, the stock market remains strong, and corporate borrowing conditions remain loose—all suggesting the current rate level has only limited restraint on the real economy. More troubling, the core inflation rate—excluding food and energy—has stubbornly remained near 2.5% over the past year, still well above the Fed’s 2% long-term target. Dallas Fed President Lorie Logan bluntly warned, “It’s better to tighten moderately now than aggressively later.” Second, the nature of the new oil shock differs from the last. In the spring’s first wave, officials could reasonably choose to look past rising energy prices, but now, the second wave driven by renewed Middle East conflict is more persistent and broader in its spillover effects, making it hard to ignore. Even more concerning, the surge in artificial intelligence-related investments has spurred demand-driven price increases—unlike tariff or oil supply shocks, these can be effectively countered with rate hikes to suppress overall demand. If left unchecked, inflation expectations could become unanchored. Finally, a rate hike carries a subtle but crucial political and personal authority aspect. Chair Walsh, appointed by a president who repeatedly called for rate cuts, has had his independence questioned. If he can withstand White House pressure and tighten policy decisively at the outset, it would thoroughly dispel any notion of him being the “White House’s puppet.” More importantly, before a unified push emerges within the Open Market Committee, an active hike would send a clear signal to the market: Walsh is leading policy, not passively following consensus. Evenflow Macro’s Marc Sumerlin commented that for a newly-appointed chair, the credibility and internal authority gained from a rate hike could far outweigh the calculated value suggested by economic models.

The Chairman’s Art of Silence: The “Troika” Fades, Market Lost in a Guessing Game

This meeting is considered the “most unpredictable” primarily because Walsh has completely changed the management style from Jerome Powell’s tenure. During Powell’s era, two vice chairs would help forge consensus before meetings and communicate clear policy signals through the “troika” communications mechanism. Walsh, although retaining internal discussion groups, explicitly favors more “combative meetings” and dislikes pre-determined outcomes. Up to last week’s blackout period, even several of his colleagues admitted they had no idea of his true stance.

Thus, investors are left to piece together clues from fragmented remarks. Governor Christopher Waller’s speech this month once spiked rate hike expectations for July, but those hopes were dashed by the subsequent mild inflation data. Meanwhile, comments from Williams and Jefferson again reinforced the “hold steady” camp. The market has fallen into collective anxiety amid these swings. Morgan Stanley Chief U.S. Economist Michael Gapen accurately noted that many investors are selectively listening to voices that fit their own conclusions—some see Walsh as a “hawk in dove’s clothing,” a traditional monetarist unwilling to let inflation worsen; others, quite the opposite, see him as a “dove in hawk’s clothing,” tough in speech but waiting for AI-driven productivity gains to naturally cool prices rather than confront the White House too soon. Neither view has solid evidence to support it.

The Chain Reaction Among Major Central Banks: Uncertainty Itself Becomes a New Risk Factor

The Fed is not alone in facing a decision point next week. The Bank of Japan and the Bank of England will also hold policy meetings simultaneously, and the policy resonance of the three major central banks will dramatically influence global capital flows and exchange rates. Amid the Fed’s marked reduction in forward guidance, market visibility into policy paths has already decreased.

Leonard Kwan, fixed income portfolio manager at T. Rowe Price, argued that weakening forward guidance is akin to “tightening financial conditions passively without actually hiking”—as uncertainty alone raises risk premiums and suppresses investors’ risk appetite. However, this tactic preserves maximum Fed flexibility to adjust in either direction, at the cost of significantly heightened market volatility. With geopolitical risks mounting and inflation pressures unresolved, the Fed’s “silence” has become an unmissable variable in the asset pricing equation.

No Verdict Yet—Anything Is Possible

Overall, it is nearly impossible to predict the outcome of next week’s meeting using traditional economic models or historical experience. A rate hike would signal to the market that the Fed under Walsh will defend its inflation target at any cost, and that the new Chair is willing to endure short-term political pain from slower growth. Keeping rates unchanged would suggest policymakers value recent data improvements more, deferring the dilemma to September. No matter the final call, this meeting will become the first true “watershed moment” of Walsh’s tenure as Chair.

As William English, former Yale University senior Fed economist, said, the decisive factor may actually be largely beyond the Fed’s control—whether the Iran conflict calms and pushes oil prices down, or worsens and leaves policymakers with an even tougher inflation challenge. It’s nearly a gamble. And Walsh now stands at the center of this gamble, holding the dice that have yet to fall.