Fed rate-hike calls grow as 4 officials flag higher rates possible

A growing number of Fed officials say the next move in interest rates may be up, not down, as inflation proves stubborn.

The Federal Reserve faces a widening rift with President Donald Trump as at least four policymakers this week signaled they could support raising interest rates, with Cleveland Fed President Beth Hammack warning inflation is "broad based" and consumers express "a growing sense of despair."

"For the first time in my tenure, I'm hearing from businesses who say they think we need to take action to curb inflation," Hammack said in a LinkedIn post Friday, adding that core inflation probably rose 3.3% in June.

Dallas Fed President Lorie Logan on Thursday called for "modestly higher interest rates," while Vice Chair Philip Jefferson and governors Lisa Cook and Christopher Waller each suggested this week they could back a hike if price pressures persist. The hawkish chorus comes as the fed funds rate sits at 5.25% to 5.5%, unchanged since July 2023, and as June CPI slowed to 3.5% from 4.2% in May — still well above the Fed's 2% target.

The shift in tone threatens to deepen a clash with Trump, who has publicly pushed for lower rates ahead of the midterm elections. Investors now see roughly a 15% chance of a hike at the Fed's July 29-30 meeting and about a 50% probability of one in September, according to CME FedWatch data.

The coordinated hawkish messaging marks a notable departure from recent months, when Fed officials largely emphasized patience and data-dependence. Hammack and Logan both dissented at the April meeting against what they viewed as overly accommodative policy, and their latest comments suggest they are rallying support for tighter action.

The last time the Fed faced this level of internal pressure to raise rates after a prolonged hold was in 2006, when the central bank lifted its benchmark to 5.25% before pausing. That cycle ended with rates held steady for more than a year before the 2008 financial crisis forced aggressive cuts.

Cross-Asset Transmission

Treasury yields rose as the hawkish commentary reinforced expectations for higher-for-longer rates. The 10-year yield climbed 2.2 basis points to 4.596%, while the two-year yield added 2.9 basis points to 4.179%. The WSJ Dollar Index edged up 0.2%, reflecting the relative appeal of U.S. rates. Oil prices remained above $80 a barrel as tensions over the Strait of Hormuz persisted, adding another layer of inflation risk that Fed officials cited in their remarks.

The resilient labor market complicates the inflation fight. Initial jobless claims fell to 208,000 last week, defying expectations for an increase to 218,000, while the Philadelphia Fed's business activity index surged to 41.4 from 10.3 in June — the highest reading in years.

Warsh Stays on Sidelines

Fed Chair Kevin Warsh, who secured the first unanimous policy decision in a year at his inaugural meeting in June, has refrained from joining the public debate. He told lawmakers this week that offering forward guidance on how data might influence his stance would be unwarranted and potentially harmful.

"My colleagues know I'm not big for forward guidance," Warsh said.

New York Fed President John Williams offered a contrasting view, arguing that "unquestionably high" inflation will soon ease, citing cooling wage growth and shelter costs as reasons for optimism.

The divergence among policymakers sets up a potentially contentious July meeting, with the possibility of dissents if the committee leans toward a hike. Evercore ISI analyst Krishna Guha said the hawkish push appears coordinated. "The hawks are coming out en masse to try to ensure the Fed follows through on Warsh's tough talk and actually raises rates in September if the next two inflation prints run hot," Guha wrote.

This article is for informational purposes only and does not constitute investment advice.