In his first public comments since the Federal Open Market Committee (FOMC) meeting in June, new Fed Chair Kevin Warsh stated that “prices are too high” while speaking at the ECB (European Central Bank) Forum on Central Banking in Sintra, Portugal, on July 1. His comments reaffirmed his intention to deliver “price stability” to markets.
While he was encouraged by inflation expectations easing, Warsh stated that it’s still not good enough. He further dismissed the possibility of the U.S. central bank being comfortable with an inflation target of anything above 2%.
While he has said the Fed will “chart a new course” under his tenure, Warsh so far has offered few specifics on what that may involve or whether a rate hike might come soon. Indeed, market expectations of interest rate cuts in early 2026 have now been replaced by the potential for rate hikes.
So, where does the Fed stand now in the lead-up to its July meeting? The central bank has been on hold recently, choosing not to adjust its target range. Indeed, the Fed has held its benchmark interest rate steady all year, keeping it in a range of 3.50% to 3.75%, after slashing rates by a quarter-point at each of the last three FOMC meetings of 2025.
“Recent comments from Fed officials placed a notable emphasis on upcoming inflation readings, and today’s weaker-than-expected CPI print put some cold water on the need for higher 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.”
Fed policymakers weigh several interrelated signals when assessing whether policy should tighten or ease. They look at whether inflation is cooling or heating up, and whether that move appears to be broad-based or concentrated in a few categories. Recent inflation readings have been uneven: While headline inflation has been influenced by swings in energy prices, underlying measures have shown a slower, stickier path back toward the Fed’s 2% target.
They also monitor labor market conditions. Hiring and wage trends help gauge whether the economy is reaccelerating or weakening. According to the June jobs report, employers added only 57,000 jobs that month (well below expectations), while the unemployment rate unexpectedly ticked down to 4.2%.
In addition, the Federal Reserve considers financial conditions and risks to market functioning. In particular, the Fed watches yields, credit spreads and lending standards to determine whether markets are easing or tightening.
The Federal Reserve Bank of Chicago’s National Financial Conditions Index (NFCI) – which aggregates a broad set of indicators across money markets, debt and equity markets, and banking-sector credit intermediation to summarize overall U.S. financial conditions – sits at an accommodative -0.50. Negative values have historically been associated with looser-than-average financial conditions. While financial conditions remain loose, however, there are signs that underlying yields and lending standards have been tightening.
Our strategists expect the Fed to keep interest rates steady through the end of 2026, as inflation continues to run above the central bank’s long-term target. They argue that the recent sharp decline in energy prices is not fully reflected in the Fed’s latest inflation projections for the year. Our strategists point out that Warsh’s hawkish stance and press conference brevity may be exaggerated, while also noting that market-based inflation expectations have already fallen below pre-Iran war conflict levels.
As of 9 a.m. Eastern on July 13, 36% of market participants are expecting a rate hike at the next Fed meeting, up from 18% on July 2, according to the CME FedWatch Tool.
The next Fed policy meeting is July 28-29. Here are four things to watch closely ahead of the next interest rate decision.
Economic data to watch: Inflation (CPI) and the jobs market
June’s CPI release, in particular, came in materially weaker than expected, with headline prices falling on the month and core inflation flat. The downside surprise was driven primarily by a sharp drop in energy prices, and the report also benefited from a softer shelter reading – suggesting that, outside of energy, inflation pressures are not reaccelerating. Overall, the data fits the view that the current inflation shock is narrower and more energy-concentrated than the broad-based episode seen in 2021–2022, though near-term dynamics will still depend on how energy prices evolve from here.
Overall, the June report strengthens the case that inflation pressures are not reaccelerating – and that the Fed can afford to stay patient while monitoring how much of the recent disinflation persists beyond energy.
“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.”
In the meantime, the New York Fed’s latest survey of consumer expectations, released on July 7, provided further clues about how investors and businesses are thinking about inflation. Median inflation expectations for next year increased by 0.2% to 3.7% overall in June, the highest level since September 2023.
June’s softer labor market data, meanwhile, could temper market expectations for a rate hike at the next policy meeting – especially if inflation continues to cool. Even with fewer new jobs in June, hiring has been on a hot streak in recent months. It appears to have stabilized from late last year, when the economy was, on average, shedding jobs each month. Fed policymakers will likely continue to monitor the health of the labor market when determining whether to raise or slash interest rates.
Fed signals: Warsh’s guidance shift and the FOMC minutes
Warsh has publicly criticized the forward guidance that the central bank traditionally forecasts to markets, something former Fed Chair Jerome Powell was known for. For example, the June FOMC written statement was significantly shorter than it has been at past Fed meetings, and Warsh said in his press conference that he would not be giving forward guidance on future policy decisions.
At the ECB Forum on July 1, he reiterated his dislike of forward guidance and declined to answer whether markets could expect a rate hike in July. This new approach to guidance means investors may have less insight into the future direction of rates and monetary policy than they have been accustomed to in past years.
The June FOMC minutes, released on July 8, further showed that policymakers are increasingly concerned about inflation, with Fed officials split over whether or not to raise interest rates this year. Half of the 18 policymakers who submitted projections at the June meeting (Warsh did not provide any forecasts) supported keeping rates unchanged or reducing them. The other half of the committee advocated for raising rates before the end of 2026.
While inflation remains above target, recent data shows that the surge in oil and gas prices that began in March may be short-lived. Earnings resilience and capital expenditure on the artificial intelligence (AI) boom have continued to help drive markets higher. Our strategists, however, believe that despite lower energy prices, markets have turned too hawkish on the path of interest rates, and our base-case scenario remains a Fed on hold.
Treasury and bond yields remain elevated due to inflation, as markets await more clarity on the Iran conflict and whether strong U.S. economic spending can continue. The 10-year yield was back above 4.55% the morning of July 13.
A rate hike could mean several things for borrowers, savers and investors.
Interest rates are essentially the cost of borrowing money. When the Fed raises rates, the cost of borrowing goes up, which in turn can slow overall economic spending in a bid to combat inflation. Conversely, the central bank lowers rates to stimulate the economy by making borrowing cheaper, which subsequently can encourage more spending.
Borrowers with variable rates may see their interest rates go up, which means they might have to pay more interest on credit card balances, for example. Borrowers seeking a new loan may also have to pay higher rates if the Fed raises its benchmark interest rate. Fixed-rate loans, like most mortgages, however, remain unaffected.
A Fed rate hike could encourage people to save more, as they might now be able to earn more interest on their savings through interest-bearing accounts like savings accounts or certificates of deposit (CDs).
Higher rates can compress growth-stock valuations by increasing discount rates. They can also be negative for companies that are more interest-rate sensitive – for example, those with elevated leverage or higher funding needs – since higher financing costs can reduce profitability and constrain investment.
Investors weighing the potential impact of the Fed decision on their portfolio may want to stay focused on their investment strategy while sticking to fundamentals like diversification and rebalancing.
Despite Warsh’s comments about prices being too high, that message by itself doesn’t guarantee a near-term shift in policy. The Fed typically looks for evidence that inflation is moving sustainably toward 2%, while remaining alert to signs it could stall or reaccelerate away from that goal, especially if pressures become broad-based.
That’s why the most likely near-term outcome may still be a hold, even if the Fed’s tone sounds more hawkish, according to our strategists. Policymakers can acknowledge inflation is above target while also choosing to wait for more clarity from upcoming inflation data, jobs reports and other measures of economic health.
At the same time, a rate hike can’t be ruled out. The Fed could choose to raise interest rates in a bid to prevent inflation from becoming entrenched – especially if officials see signs that inflation pressures are broadening again.
For investors, the practical takeaway is to prepare for a range of outcomes rather than try to predict the result of a single Fed meeting. It may help to confirm your portfolio is well-diversified across asset classes and geographies, and that your exposure to interest-rate and inflation risk aligns with your long-term goals and risk tolerance.
Some investors may also consider real assets – such as commodities, infrastructure or real estate – as potential diversifiers that may be more inflation-resilient, though performance can vary and these assets can be volatile (and sometimes rate-sensitive). Gold is another diversifier used in periods of inflation uncertainty or geopolitical stress, but it doesn’t generate income and can be influenced by real rates and currency moves. A qualified financial advisor can help determine an appropriate asset mix – and whether and how real assets should be represented – for your situation.
