The Federal Reserve is expected to keep rates unchanged for now despite high prices

WASHINGTON — Federal Reserve policymakers are getting increasingly impatient with inflation but they may not be ready to act on that aggravation — not this week, at least.

The Fed is widely anticipated to hold its benchmark interest rate steady when it meets Tuesday and Wednesday in Washington. When the central bank’s rate-setting committee next meets Sept. 15-16, its members may not be so hesitant to move.

Inflation has stayed over the Fed’s 2% objective for more than five years. Newly installed Fed Chair Kevin Warsh warned Congress earlier this month that he has “no tolerance” for inflation that stays elevated. Warsh is chairing his second policy meeting this week.

Fed watchers Joseph Egelhof and Guneet Dhingra at BNP Paribas Securities predict Warsh’s central bank could “release the kraken’’ with a “shock rate hike’’ this week. More likely, they believe, officials would wait, unwilling to risk unsettling financial markets not yet pricing in a rate hike.

More statistics on the economy may also be on policymakers’ minds, with the Commerce Department releasing the first look at April-June GDP growth on Thursday and also the Fed’s preferred inflation indicator — the personal consumption expenditures (PCE) price index – for June.

Only 29% of Wall Street traders think the Fed will hike rates this week overall. But 76 percent predict a rate increase in September. The CME FedWatch tool showed traders were pricing in only a 59% chance of a rate hike in September a month ago.

“Policymakers’ patience with high and persistent inflation is broadly exhausted, so there is a significant risk’’ of a rate hike in September, wrote Egelhof and Dhingra.

Rising violence in Iran casts uncertainty about the Fed’s decision-making. The Battle for Oil Last week, the struggle intensified and briefly pushed oil prices beyond $100 a barrel. Since then, hopes for a reduction of tensions between the United States and Iran have eased.

Jordan shot down missiles launched from Iran early Wednesday morning, hours after the U.S. military reported it shot down another Iranian assault thrown at American forces in the Middle East, breaking a brief lull in warfare.

Now Iranian-backed Houthi rebels from Yemen are assaulting shipping in the Red Sea in an attempt to halt tankers carrying Saudi Arabian oil from passing through the Bab el-Mandeb Strait.

The uncertainty has the Fed’s inflation warriors in a bind.

Yes, the recent runup in price could be a temporary blip that will be corrected sooner rather than later. “On the other hand, it seems equally likely that the war with Iran will get worse, that the Strait of Hormuz and Bab al-Mandab will remain blockaded for months or longer, and that energy prices will continue to trend up,” stated Carl Weinberg, chief economist at High Frequency Economics.

"Should the Fed set monetary conditions on a hope that oil prices will reverse course and stay low ... or should a central bank reject wishful thinking and undertake its job of lowering the probabilities that inflation will exceed target?'

Inflation has been above the Fed’s 2% objective since early 2021, when the U.S. economy overheated as it rebounded from COVID-19 lockdowns. Inflation peaked at just over 9% in mid-2022, then started to come down as the Fed hiked rates 11 times between 2022 and 2023. But there has been pretty much no progress.

Besides the Iran war, other factors contributing to inflation pressure include President Donald Trump’s tariffs on foreign goods and a boom of investment in data centers to power artificial intelligence, pushing up the cost of computer chips and equipment and electricity.

Apartment rents are not growing as quickly as they had been, helping to decrease so-called core inflation -- which excludes volatile food and energy prices -- in June. And a short dip in gasoline prices last month also helped to keep total inflation in check.

But numerous Fed members have been saying the Fed will have to hike rates to get inflation back to the 2% target.

“Staring inflation down until it melts before our withering gaze is not an option,” said Christopher Waller, a key member of the Fed’s governing board, in a speech this month.