WASHINGTON: Federal Reserve (Fed) chairman Kevin Warsh hammered home the message this week that the US central bank is on inflation watch. The test to deliver on that promise could come soon.

Fed officials are expected to leave interest rates unchanged when they gather in Washington on July 28-29.

But the “family fight” that Warsh has advocated could come to a head in the meetings that follow amid a renewed surge in oil prices and an artificial intelligence (AI) boom that’s sent costs for technology and equipment soaring.

The tension was clear over a week-long blitz of commentary just before Fed officials went into a mandatory quiet period leading up to their July decision, as some officials warned of an urgent need to act while others signalled there’s still time to wait for more data.

Warsh himself led the chorus with a clear message: The central bank has no tolerance for inflation, he said, persistent price hikes won’t last under his watch and better-than-expected June inflation data left them far from declaring mission accomplished.

“My commitment to you is to take sticky prices and to unstick them,” Warsh told lawmakers during testimony on Capitol Hill.

Warsh stopped short of saying explicitly that it might be necessary to raise rates. But it was tough talk, especially considering that Warsh was chosen for the job by President Donald Trump,  who made clear he wanted the new chair to lower rates.

His vice chair, Philip Jefferson, went a bit further last Thursday. He said the central bank could consider raising interest rates if inflation doesn’t cool soon, though policy remains well positioned for now.

Governor Lisa Cook said she’s also prepared to act, but that policymakers have time to assess the incoming data. New York Fed president John Williams suggested that inflation has peaked.

In a sign of division, other officials signalled a greater sense of urgency.

Dallas Fed president Lorie Logan called for higher rates, while governor Christopher Waller and Cleveland president Beth Hammack warned there may be a case to raise rates. Hammack went on to say that for the first time in her two-year tenure, businesses have told her the Fed will need to act to rein in inflation.

All three of those officials will vote on the July policy decision, so that sets up the potential for at least some dissents, and perhaps even a surprise that would catch markets off-guard.

Warsh, after all, has made it clear that, unlike his predecessor, he’s not interested in signalling rate moves to investors ahead of time. Yet, like investors, most analysts see a July hike as a long shot. 

“The Fed is more hawkish, but the leadership is not in any hurry to act,” said Heather Long, chief economist at Navy Federal Credit Union. “The key question is how broad-based inflation is and whether it’s sticky. It will take time to assess that.”

While consumer prices declined in June for the first time in six years and a key gauge of underlying inflation was little changed, the reprieve may be short lived.

A renewal of hostilities between Iran and the United States has sent oil prices surging again, and economists say price pressures are increasingly being driven by demand linked to the AI boom.

Midterm elections in November pose a complication. A potential rate hike from the Fed this fall could invite renewed political pressure from the White House. 

In the lead-up to securing the Fed chair nomination, Warsh had sketched out a road map to lower rates, in part based on a potential productivity boom spurred by AI.

But if price pressures are broad based and persistent, he may have to hike to keep his pledge to slay inflation.

Diane Swonk, chief economist at KPMG said the danger is that the series of one-off price hikes that have hit the United States could eventually help to entrench inflation, leaving the Fed with little option but to respond and begin to unwind rate cuts they pushed through just a year ago. 

“The hawks have gone from the edges to the centre of the Fed,” she said. “The ranks of those doubting the last rate cuts of 2025 are mounting.” — Bloomberg