The Federal Reserve is increasingly divided on the inflation outlook. Williams, the Fed's third-ranking official and president of the New York Fed, cited six reasons to believe that inflation has peaked and outlined a clear path back to the 2% target by 2028. Meanwhile, Governors Cook and Waller have repeatedly signaled hawkishness, warning that they are prepared to raise interest rates if inflation fails to decline sustainably. Although the unexpectedly strong decline in both June's CPI and PPI provided a short-term respite for the market, the renewed escalation of tensions in the Middle East has caused energy prices to rise again, leaving the policy balance unclear ahead of the Fed's July meeting.

Williams: Six Reasons Inflation Has Peaked and the 2% Target Returned by 2028

New York Federal Reserve President Williams said on Wednesday (July 15) that while the current inflation rate is "undoubtedly too high," there are encouraging reasons to believe that inflation may have peaked and will gradually decline in the coming quarters. Williams pointed out that the current inflation rate is around 4%, well above the Federal Open Market Committee's (FOMC) 2% long-term target. He detailed three main factors that have driven inflation higher over the past year: tariff increases, supply chain disruptions, soaring energy prices due to the Middle East wars, and strong corporate investment in artificial intelligence. These three factors together constitute the core drivers of inflation over the past year. Based on this, Williams outlined six reasons supporting his optimistic assessment: First, the impact of tariffs has been largely absorbed. The price increases resulting from tariffs have largely materialized, and the subsequent marginal impact is limited. Second, housing inflation continues to decline. The cooling trend in the housing market is expected to continue, and housing-related prices will further decline. Third, oil prices may have peaked. The peak in energy prices may have passed, despite the uncertainty brought by the recent escalation of the Middle East situation. Fourth, the AI supply-demand imbalance is gradually easing. The supply-demand imbalance caused by the surge in artificial intelligence infrastructure construction is expected to ease over time. Fifth, the labor market is not under pressure. The current job market is robust but is not putting additional pressure on inflation. Sixth, inflation expectations remain stable. Medium- to long-term inflation expectations remain anchored, with no significant risk of decoupling. Based on these six reasons, Williams gave a clear inflation forecast path: the overall inflation rate will fall to about 3.25% by the end of 2026, then continue to move along a downward trajectory toward the Fed's 2% target, and stabilize at this target in 2028. He also expects real GDP growth to remain between 2.0% and 2.25% in 2026 and the next two years, and the unemployment rate to gradually decline from the current 4.2% to around 4.0% in 2028. Williams emphasized that the current monetary policy stance is well-positioned to achieve this goal. He stated last week that he had become more optimistic about a possible easing of the high overall inflation level, partly because energy prices were falling at the time, driven by optimism that the Middle East wars might be resolved. However, since then, the renewed escalation of hostilities between the US and Iran, and the sharp rise in oil and related energy product prices, have added new uncertainty to the inflation outlook.

Cook: Inflation risks have outweighed employment risks; we are prepared to take action at any time.

In stark contrast to Williams' optimistic tone is Federal Reserve Governor Cook's hawkish stance. Speaking at an event in Washington on July 15, Cook stated unequivocally that she was "prepared to act" if inflation did not begin to decline soon. Cook pointed out that the main risk facing the U.S. economy has shifted from the job market to inflation. She compared the current situation to a year ago—a year ago, she believed the labor market deserved more attention from policymakers; now, "almost all indicators show the labor market is stable." She stated bluntly, "In fact, I see almost no reason to believe that the labor market faces greater risks today than it did a year ago. Therefore, the risks to employment have diminished, and the risk balance has shifted further towards the inflation target." Cook's analysis of the causes of inflation is highly consistent with Williams' assessment, but her conclusion is more cautious. She pointed out that price pressures from continued increased investment in artificial intelligence infrastructure, as well as supply shocks caused by tariffs and the U.S.-Iran conflict in the Middle East, could all contribute to persistently high inflation. She particularly emphasized that although the Middle East conflict pushed up energy prices earlier this year, the continued rise in commodity prices "highlights that the recent acceleration in inflation is not just a matter of energy prices." Cook maintained a highly cautious stance regarding the June CPI data released this week—the first month-on-month decline in six years. She pointed out that, according to the Fed's preferred inflation gauge, the current inflation rate is still nearly double the Fed's 2% target. She emphasized, "This is only one month's data, and one month's data doesn't form a trend. Therefore, we must monitor inflation very carefully in real time." Cook stated that the current policy rate of 3.50%-3.75% is "somewhat restrictive," and the FOMC does not need to rush into action; policymakers still have time to assess subsequent data. However, she also clearly drew a red line: "If we do not see signs of continued decline in inflation soon, I am prepared to take action. I remain firmly committed to achieving the inflation target, and this commitment will not waver."

Waller: Policy at a "crossroads," interest rate hikes needed as soon as core inflation rises again.

Federal Reserve Governor Waller also delivered a clear hawkish signal in his speech on July 13, describing the current monetary policy as being at a "crossroads." Speaking at the New York Association for Business Economics, Waller stated that if core inflation data rises again in the near term, the FOMC may need to raise interest rates. He pointed out that current inflationary pressures are no longer solely stemming from commonly cited factors such as tariffs and rising energy prices, but have expanded to a wider range of areas. He specifically mentioned that the demand spillover effect brought about by artificial intelligence is one of the important reasons why inflation continues to exceed the Fed's 2% target. Waller issued a clear warning about inflation data: "We are basing policy on essentially five to six consecutive 'higher, higher, higher' inflation readings. If I get another higher reading, I will see it as a signal, not noise." He further pointed out that in the core services category—which accounts for 75% of core prices—nearly 70% of the categories have 3-month and 12-month inflation rates exceeding 3%. In terms of policy logic, Waller demonstrated a cautiously balanced stance. On the one hand, he warned against falling into the mindset of "fighting the last war"—tightening policy prematurely just because the response to inflation was too late in 2021. He stated, "I am well aware that our failure to respond promptly to the high inflation we observed in 2021 was a mistake. I am determined to avoid repeating that mistake." On the other hand, he also warned against repeating the mistake of delaying the response to inflation. Waller stated that there are still "sufficient reasons to believe that inflation will begin to decline again"; however, there is also an "equally plausible" scenario where inflation may remain high or even rise further, "at which point monetary policy may need to be tightened in the near term." He emphasized that he would be pleased if core inflation data showed a decline, but "given the continued rise in core inflation in the first half of this year, I still need to see several consecutive months of data improvement before I can be confident that inflation is moving in the right direction."

Warsh: Congressional debut emphasizes "zero tolerance," refuses to give hints about interest rate path

Federal Reserve Chairman Walsh made his congressional debut on Tuesday (July 14) by testifying before the House Financial Services Committee for three hours. Less than two hours before the hearing began, the Labor Department released June's CPI data—up 3.5% year-on-year, lower than the expected 3.8%. Markets quickly lowered their bets on a July rate hike by the Fed. However, Walsh did not offer any hints about the interest rate path as the market had hoped. In his testimony, he emphasized upfront that the Fed's top priority is restoring price stability and ensuring that the high inflation of the past five years is history. He stated that the Fed has "zero tolerance" for persistently high inflation, and committee members will not tolerate persistently high inflation. Regarding the significantly lower-than-expected June CPI data, Walsh bluntly stated, "Some might say the (inflation) mission is accomplished, but I don't see it that way." Nick Timuraus, a veteran journalist often referred to as the "new Fed mouthpiece," pointed out that Walsh deliberately avoided giving any hints about the future interest rate path, focusing the hearing on reiterating the Fed's long-term goal of controlling inflation. Bloomberg commented that Warsh's overall rhetoric was hawkish, indicating his reluctance to easily signal easing until inflation is confirmed to have consistently returned to target. Warsh also incorporated AI into his inflation analysis framework. He pointed out that one of the main reasons for the rapid growth in US corporate investment is the construction of data centers and the large demand for AI-related equipment and software supporting these data centers. In the year ending in the first quarter of 2026, overall US equipment investment is projected to grow by about 8%, with spending in the high-tech sector growing by nearly 25% cumulatively over four quarters. However, he also warned that while AI is driving investment, it also brings uncertainty to the economy. Regarding monetary policy independence, Warsh made a clear commitment: "The Fed will remain independent during my term." He stated, "The Fed's strength comes not only from the printing press—although it is sometimes useful—but also from our credibility." On Wednesday, Fed Chairman Warsh reiterated to US lawmakers that he believes the Fed has not yet achieved its mandate to maintain price stability, but declined to reveal how or when it will address this issue, noting that the options available are "not limited to one," including raising interest rates, keeping rates unchanged, or lowering them.

Beige Book: The economy is expanding moderately, and inflation is flat or slowing.

The latest Beige Book released by the Federal Reserve on July 15th showed that U.S. economic activity grew at a slight to moderate pace in recent weeks. Of the 12 Federal Reserve districts, 11 reported slight or moderate growth in economic activity, while one remained unchanged. Regarding prices, the report noted that price increases were flat or slowed in all districts compared to the previous reporting period. However, districts had differing views on price trends in the coming months—some respondents expected inflation to maintain its current pace, while others believed that price increases might slow, partly due to lower fuel prices. Several Federal Reserve districts cited fuel costs as keeping the outlook uncertain. In terms of the labor market, employment levels in most districts remained largely unchanged or almost unchanged. This is consistent with recent assessments by Federal Reserve officials that the labor market is stable and not putting additional pressure on inflation. It is worth noting that the Beige Book data was collected up to July 6th. At that time, the U.S.-Iran conflict was in a relatively calm phase, and energy prices had fallen somewhat. The situation subsequently deteriorated rapidly, with hostilities escalating again, adding new uncertainties to the already volatile inflation outlook.

June inflation data: CPI fell for the first time in six years, PPI saw its biggest drop in 14 months.

Data from the U.S. Department of Labor showed that the CPI fell 0.4% month-on-month in June, the first decline in six years, far exceeding market expectations of a 0.1% drop; year-on-year, it rose 3.5%, lower than the expected 3.8% and the previous value of 4.2%. Core CPI was flat month-on-month and rose 2.6% year-on-year. Energy prices were the biggest driver of the decline in inflation. The PPI released the following day also cooled more than expected. The PPI fell 0.3% month-on-month in June, the largest drop in 14 months; the year-on-year increase slowed from 6.0% to 5.5%. A 1.4% drop in commodity prices was the main reason for the PPI decline, with energy product prices falling 6.4% and gasoline prices plummeting 12%. After the data was released, market expectations for a Fed rate hike cooled rapidly. The probability of a July rate hike shown in the interest rate swap market plummeted to about 20%. Traders further lowered their expectations for a Fed rate hike later this month, with the market pricing in a rate hike of about 3 basis points, meaning a probability of a 25 basis point rate hike of about 10%. However, the probability of a rate hike in September remains high at 50%.

[Editor's Summary]

June's CPI and PPI both cooled more than expected, providing short-term evidence that inflationary pressures are easing. However, Federal Reserve officials interpreted this with significant divergence: doves, represented by Williams, believe inflation has peaked and interest rates are at an appropriate level, providing a clear path back to the 2% target by 2028; hawks, represented by Cook and Waller, warned of potential action if inflation does not continue to decline, emphasizing the broad-based and sticky nature of core inflation. Chairman Warsh deliberately avoided providing guidance on the interest rate path in his congressional debut, maintaining a "zero-tolerance" stance but refusing to reveal policy direction. His cautious approach reflects both the depth of internal divisions within the Fed and the new chairman's policy philosophy of avoiding market over-interpretation of single-month data. Geopolitics is currently the biggest uncertainty—the optimism before July 6th, upon which the Beige Book was based, has been shattered by the escalating conflict in the Strait of Hormuz, and the return of oil prices to an upward trend could reverse the cooling inflation trend of June. Continued investment in AI continues to push up related prices, posing another upside risk. Ahead of the FOMC meeting on July 28-29, geopolitical developments and oil price trends will be the core focus of the market, while the debate between doves and hawks within the Federal Reserve will continue to affect market sentiment.

Frequently Asked Questions

Q: What is the core of the disagreement between Williams and Cook? A: Williams believes inflation has peaked and will gradually decline, and that monetary policy is currently in a suitable position, with no need to rush to raise interest rates. He listed six reasons to support his optimistic assessment and gave a clear path back to the 2% target by 2028. Cook, on the other hand, believes that inflation risks have outweighed employment risks, and he is prepared to take action if he sees no further signs of declining inflation. Their disagreement reflects the opposing stance within the FOMC: half of the officials believe there is no need for a rate hike this year, while the other half expects at least one rate hike. Q: What are the similarities and differences between Waller's and Cook's positions? A: Waller and Cook are both hawks, both warning that if inflation remains high, a rate hike should be implemented as soon as possible. However, Waller emphasizes caution—he warns against "fighting a repeat of the last war," meaning that policy should not be tightened prematurely this time because the response in 2021 was too late. He needs "months of continuous data improvement" to be confident that inflation is on the right track. Cook, however, is more direct, stating that he is "ready to act." Q: What signals did Warsh's first congressional appearance send? A: Warsh deliberately avoided giving any hints about the interest rate path, despite the June CPI data being significantly lower than expected. He bluntly stated, "Inflation task accomplished? I don't think so." His overall tone was hawkish, indicating his unwillingness to signal easing until he confirms inflation has consistently returned to the target. He also incorporated AI into his inflation analysis framework, pointing to rapid growth in high-tech investment. Q: Why did the June inflation data fail to dispel concerns about interest rate hikes? A: Although the June CPI saw its first month-on-month decline in six years and the PPI experienced its largest drop in 14 months, Cook emphasized that "one month's data cannot form a trend." Waller also pointed out the need for "several months of data improvement." Furthermore, the Beige Book data collection ended on July 6th; the subsequent escalation of the Middle East conflict and the surge in oil prices could reverse the cooling trend of June. Q: How will the Middle East situation affect the Fed's decisions? A: The Beige Book explicitly listed the fuel cost outlook as a "higher uncertainty" factor. The cooling of inflation in June was largely due to falling energy prices, while oil prices surged after the collapse of the US-Iran ceasefire agreement. Analysts believe that if the conflict continues to escalate, oil prices could once again approach $100 per barrel. Williams also acknowledged that his earlier optimism was partly based on the prospect of a resolution to the Middle East war, but the conflict subsequently escalated again.