Fed Officials Signal Inflation Crackdown Ahead of Next Interest Rate Meeting

In public appearances this week, a number of top Federal Reserve officials signaled a strict crackdown on sticky inflation, setting a hawkish tone ahead of the next policy meeting later this month.

Fed Chairman Kevin Warsh made his first Congressional appearance in the new role on Tuesday, telling lawmakers that members of the rate-setting Federal Open Market Committee “have no tolerance for persistently elevated inflation.” 

Data released this week showed that inflation cooled in June, with the consumer price index posting an annual gain of 3.5%, down from 4.2% the prior month. However, the reprieve might be temporary after oil prices shot back up this month, and Warsh said that he remained concerned.

"There might be some that look at this morning's data and say, 'oh, mission accomplished, everything is swell. That is not my view," he said.

The Fed uses higher interest rates to fight inflation, and lower rates to stimulate the job market, in line with the central bank's dual mandate of price stability and maximum employment. The Fed targets a 2% cap on inflation, but key gauges have exceeded that level since early 2021.

In a speech this week at The Exchequer Club of Washington, DC, Fed Gov. Lisa Cook said that the Iran war and massive spending on AI data centers were tilting the balance of risks back toward inflation, after a period in which labor market concerns dominated.

"Both of these new developments add weight to the inflation risk side of the seesaw, which is now tilting toward the ground," said Cook. "As a whole, I see a notable shift in the balance of risks relative to a year or so ago, with inflation risks now outweighing employment risks."

Earlier in the week, Fed Gov. Chris Waller, who until recently had advocated for rate cuts, sounded the alarm about resurgent inflation.

"Sternly staring at inflation until it melts before our withering gaze is not an option," he said. "If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term."

The renewed focus on inflation presents a mixed bag for homebuyers. On the one hand, it signals potential Fed rate hikes in the near term, which could keep mortgage rates close to their present level around 6.5%, or send them even higher.

On the other hand, mortgage rates are unlikely to fall significantly until the Fed brings inflation fully and finally back under control. From that perspective, a hawkish Fed is good for the housing market in the long run.

The FOMC will hold its next vote on interest rates on July 28. Financial markets estimate an 85% chance that policymakers will leave the current benchmark rate unchanged in its current range of 3.5% to 3.75%, according to CME FedWatch.

Meanwhile, mortgage rates are at 6.55%, according to Freddie Mac. That's up sharply from the three-year low of 5.98% briefly reached in February, before the U.S. war with Iran sent oil prices soaring.

Mortgage rates are especially sensitive to inflation, because lenders demand a high enough interest rate to both offset the risk of the loan and compensate for the falling purchasing power of the dollar over the lengthy term.

"Sternly staring at inflation until it melts before our withering gaze is not an option," he said. "If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term."

The renewed focus on inflation presents a mixed bag for homebuyers. On the one hand, it signals potential Fed rate hikes in the near term, which could keep mortgage rates close to their present level around 6.5%, or send them even higher.

On the other hand, mortgage rates are unlikely to fall significantly until the Fed brings inflation fully and finally back under control. From that perspective, a hawkish Fed is good for the housing market in the long run.

The FOMC will hold its next vote on interest rates on July 28. Financial markets estimate an 85% chance that policymakers will leave the current benchmark rate unchanged in its current range of 3.5% to 3.75%, according to CME FedWatch.

Meanwhile, mortgage rates are at 6.55%, according to Freddie Mac. That's up sharply from the three-year low of 5.98% briefly reached in February, before the U.S. war with Iran sent oil prices soaring.

Mortgage rates are especially sensitive to inflation, because lenders demand a high enough interest rate to both offset the risk of the loan and compensate for the falling purchasing power of the dollar over the lengthy term.