Kevin Warsh’s early July remark that “prices are too high” indicates the Federal Reserve remains preoccupied with inflation, yet it does not necessarily point to an immediate interest interest rates in the near-term,” J.P. Morgan Wealth Management Global Investment Strategist Vinny Amaru said. “Underlying inflation dynamics remain tame and should allow for the Fed to be patient.”
Will the Fed cut rates at the next meeting? 3 factors to consider
Fed policymakers evaluate several interconnected signals when determining whether to tighten or loosen monetary policy. They examine whether inflation is rising or falling and if those movements are widespread or limited to specific sectors. Recent inflation data has been inconsistent: while headline inflation has been affected by volatile energy costs, underlying metrics have shown a slower, more persistent path back to the Fed’s 2% goal.
They also track labor market health. Trends in hiring and wages help determine if the economy is gaining speed or cooling down. According to the June jobs report, employers added only 57,000 positions—falling well short of expectations—while the unemployment rate unexpectedly dipped to 4.2%.
Additionally, the Federal Reserve evaluates financial conditions and risks to market stability. Specifically, the Fed monitors yields, credit spreads, and lending standards to gauge whether markets are tightening or loosening.
The Federal Reserve Bank of Chicago’s National Financial Conditions Index (NFCI)—which combines various indicators from money, debt, and equity markets, along with banking-sector credit—currently sits at an accommodative -0.50. Historically, negative values have signaled looser-than-average financial conditions. While conditions remain loose, there are indications that underlying yields and lending standards are beginning to tighten.
Our strategists anticipate the Fed will hold interest rates steady through the end of 2026, as inflation continues to exceed the central bank’s long-term target. They contend that the recent sharp drop in energy prices is not fully accounted for in the Fed’s latest inflation forecasts for the year. Our strategists suggest that Warsh’s hawkish tone and brief press conferences may be overstated, while also noting that market-based inflation expectations have already dipped below levels seen before the Iran conflict.
As of 9 a.m. Eastern on July 13, 36% of market participants expect a rate hike at the next Fed meeting, an increase from 18% on July 2, according to the CME FedWatch Tool.
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What to watch before the next Fed decision on July 29
The next Fed policy meeting is scheduled for July 28-29. Here are four key areas to monitor closely ahead of the upcoming interest rate decision.
Economic data to watch: Inflation (CPI) and the jobs market
The June CPI release was notably weaker than anticipated, with headline prices falling for the month and core inflation remaining flat. This downside surprise was primarily fueled by a significant decline in energy costs, and the report also benefited from a softer shelter reading—indicating that, outside of energy, inflationary pressures are not accelerating. Overall, the data supports the view that the current inflation shock is more narrow and energy-focused than the broad-based episode of 2021–2022, though short-term trends will depend on future energy price movements.
In general, the June report bolsters the argument that inflation is not reaccelerating and that the Fed can afford to remain patient while observing how much of the recent disinflation persists beyond the energy sector.
“This CPI report is positive for the Fed, consumers and financial markets,” Amaru said. “Softer headline and core readings support a continued ‘on-hold’ Fed and reinforce our view that the macro backdrop remains constructive for risk assets.”
Meanwhile, the New York Fed’s latest survey of consumer expectations, released on July 7, offered additional insight into how businesses and investors view inflation. Median inflation expectations for the coming year rose by 0.2% to 3.7% in June, marking the highest level since September 2023.
June’s softer labor market data could potentially dampen market expectations for a rate hike at the next policy meeting, particularly if inflation continues to subside. Even with fewer jobs added in June, hiring has been robust in recent months. It appears to have stabilized compared to late last year, when the economy was losing jobs on average each month. Fed policymakers will likely continue to assess the strength of the labor market when deciding whether to raise or cut rates.
Fed signals: Warsh’s guidance shift and the FOMC minutes
Warsh has publicly criticized the forward guidance traditionally provided by the central bank, a practice associated with former Fed Chair Jerome Powell. For instance, the June FOMC written statement was notably more concise than in previous meetings, and Warsh stated during his press conference that he would not provide forward guidance regarding future policy moves.
At the ECB Forum on July 1, he reaffirmed his opposition to forward guidance and declined to specify whether markets should anticipate a rate hike in July. This shift in approach means investors may have less clarity regarding the future trajectory of rates and monetary policy than they have experienced in recent years.
The June FOMC minutes, released on July 8, further indicated that policymakers are increasingly worried about inflation, with Fed officials divided on whether to raise interest rates this year. Half of the 18 policymakers who submitted projections at the June meeting (Warsh did not provide forecasts) supported keeping rates steady or cutting them. The other half advocated for rate hikes before the end of 2026.
Although inflation remains above the target, recent data suggests that the surge in oil and gas prices that began in March might be temporary. Earnings resilience and capital expenditure related to the artificial intelligence (AI) boom have continued to support market gains. Our strategists, however, believe that despite lower energy prices, markets have become too hawkish regarding the path of interest rates, and our base-case scenario remains a Fed on hold.
Treasury and bond yields remain high due to inflation, as markets await further clarity on the Iran conflict and whether strong U.S. consumer spending can be sustained. The 10-year yield was back above 4.55% on the morning of July 13.
What a rate hike could mean for borrowers, savers and investors
A rate hike carries various implications for borrowers, savers, and investors.
Interest rates essentially represent the cost of borrowing capital. When the Fed increases rates, borrowing costs rise, which can dampen overall economic spending in an effort to curb inflation. Conversely, the central bank lowers rates to stimulate the economy by making borrowing more affordable, which can encourage increased spending.
Borrowers with variable-rate loans may see their interest rates climb, leading to higher payments on items like credit card balances. Those seeking new loans may also face higher rates if the Fed raises its benchmark. However, fixed-rate loans, such as most mortgages, remain unaffected.
A Fed rate hike could incentivize saving, as individuals might earn higher interest on savings accounts or certificates of deposit (CDs).
Higher rates can compress the valuations of growth stocks by increasing discount rates. They can also negatively impact companies that are sensitive to interest rates—such as those with high leverage or significant funding requirements—since increased financing costs can diminish profitability and limit investment.
Investors evaluating the potential impact of the Fed’s decision on their portfolios may want to focus on their investment strategy while adhering to fundamentals like diversification and rebalancing.
The bottom line
Despite Warsh’s remarks about prices being too high, that message alone does not guarantee a near-term policy shift. The Fed typically seeks evidence that inflation is moving sustainably toward 2%, while remaining vigilant for signs that it could stall or accelerate away from that goal, especially if pressures become widespread.
For this reason, the most probable near-term outcome remains a hold, even if the Fed’s tone appears more hawkish, according to our strategists. Policymakers can acknowledge that inflation is above target while choosing to wait for more clarity from upcoming inflation data, jobs reports, and other economic indicators.
At the same time, a rate hike cannot be entirely ruled out. The Fed could decide to raise rates to prevent inflation from becoming entrenched, particularly if officials observe signs that inflationary pressures are broadening once again.
For investors, the practical takeaway is to prepare for a variety of scenarios rather than attempting to predict the outcome of a single Fed meeting. It may be beneficial to ensure your portfolio is well-diversified across different asset classes and geographies, and that your exposure to interest-rate and inflation risk aligns with your long-term objectives and risk tolerance.
Some investors might also consider real assets—such as commodities, infrastructure, or real estate—as potential diversifiers that may be more resilient to inflation, though performance can vary and these assets can be volatile and sometimes sensitive to interest rates. Gold is another diversifier used during periods of inflation uncertainty or geopolitical stress, but it does not generate income and can be influenced by real rates and currency fluctuations. A qualified financial advisor can help determine an appropriate asset mix—and whether and how real assets should be included—for your specific situation.
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