Fed rate-hike voices swell before July decision, rates still seen on hold

July 17 (Reuters) – Cleveland Fed President Beth Hammack on Friday added her voice to a growing chorus of policymakers arguing interest rates may need to rise to beat back persistent inflation, setting up a charged debate at the Fed’s next meeting and the possibility of dissents at Chairman Kevin Warsh‘s second meeting at the helm.

“For the first time in my tenure, I’m hearing from businesses who say they think we need to take action to curb inflation, and from consumers who can’t make ends meet about a growing sense of despair,” said Hammack, who joined the Fed in 2024 after it ended a run of sharp rate hikes to fight the surge in inflation after the pandemic.

“Inflation is too high. The labor market is right around my level of maximum employment,” Hammack said in a LinkedIn post on the last day that Fed policymakers are permitted to speak publicly ahead of their upcoming meeting.

Hammack said underlying inflation, as measured by the core personal consumption expenditures price index, probably rose 3.3% in June.

“Persistently high inflation is the bigger concern,” added Hammack, a voter this year on Fed policy who in April cast a dissent protesting what she and two colleagues felt was overly accommodative policy.

The hawkish comments capped a week of talk from Fed policymakers who all expressed concern about higher fuel prices due to the Middle East conflict and rising price pressures from the fast-paced build out of AI-related data centers.

On Thursday, Dallas Fed President Lorie Logan, who joined Hammack in dissenting at April’s meeting, told a group in Houston that the situation requires “modestly higher interest rates.” Fed Vice Chair Philip Jefferson, who is typically cautious about expressing policy views, told a Stanford University audience that if inflation “does not start to cool down soon, I believe that it could ⁠be appropriate to reconsider our current policy stance.”

Traders of interest-rate futures now see about a 15% chance of a July rate hike, rising to about 65% by the Fed’s next meeting in September.

“Our interpretation is 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 over the summer and/or continued US-Iran conflict pushes oil prices and inflation expectations higher on a sustained basis,” wrote Evercore ISI analyst Krishna Guha.

WARSH REFRAINS FROM JOINING PUBLIC DEBATE

Not all of the Fed officials on the speaking circuit this week were as extensively focused on the upside risks to inflation.

New York Fed President John Williams, by contrast, said he believes that “unquestionably high” inflation will soon ease, citing half a dozen reasons including the lack of wage-growth pressure from the labor market and his view that shelter inflation will continue to ease.

Warsh, who at his first meeting as Fed leader last month managed to wrangle the first unanimous policy decision in a year, stayed determinedly mum, telling lawmakers this week he feels it would be unwarranted and could even be harmful to hint at how the data is likely to influence his stance on policy.

“My colleagues know I’m not big for forward guidance,” he said.

Consumer price inflation slowed more than expected in June, increasing by a still-high 3.5% from a year earlier after surging 4.2% in May, the Labor Department said this week.

Fed Governor Christopher Waller, who argues that telling the public how data impacts Fed policymakers’ decision-making is central to the job, signaled the cooling would give him small comfort. On Monday, he said he would need to see “several months” of cooler readings before feeling inflation was headed back to the Fed’s 2% goal.

(Reporting by Ann Saphir; Editing by David Gregorio, Dan Burns and Nick Zieminski)