Economist Diane Swonk of KPMG believes the hawkish element within the Federal Reserve is not only becoming stronger but also broader, implying a growing consensus among policymakers to take stricter actions against inflation. Although the Fed is widely expected to keep interest rates steady at 3.50-3.75 percent for the fifth consecutive meeting, Swonk anticipates dissents from some policymakers who are concerned about the economy's trajectory since the beginning of the year. This sentiment is echoed by Governor Christopher Waller, who stated on July 13th that the Fed must be prepared to tighten monetary policy to avoid a repeat of the 2021-2022 inflation episode. Many policymakers' patience is reportedly thinning regarding inflation, and most are ready to act if inflation does not soon return to the 2 percent target.
Swonk highlights that the easing of consumer inflation to 3.5 percent year-on-year last month provided a temporary reprieve, but she foresees two rate hikes later this year due to expected price rises. The inflation has been exacerbated by recent geopolitical events, including the Iran war, which has caused fluctuations in oil prices. Previous shocks from the pandemic, the Russia-Ukraine war, and Trump's tariff policies have also contributed. Swonk suggests that these repeated shocks are creating a behavioral pattern among businesses to raise prices, a trend the Federal Reserve is mandated to prevent.
There is an unusual degree of uncertainty surrounding the outcome of the current Fed meeting, partly due to Chairman Kevin Warsh's reluctance to publicly share his economic outlook, as part of his proposed reforms. Gregory Daco, chief economist at EY, characterized this as a highly unusual meeting. Governor Lisa Cook has also indicated that she would be prepared to raise interest rates if inflation persists, aligning with other Fed officials who now view accelerating inflation as a greater concern than the labor market.
