A few weeks ago, the market expected the Federal Reserve's July 28-29 interest rate policy meeting to be uneventful. Now, this meeting is poised for a fierce debate. Economists, traders, and a host of Fed watchers had widely predicted that the Federal Open Market Committee (FOMC) would keep the federal funds rate unchanged. The logic supporting this assessment at the time included a stabilizing labor market, a significant drop in oil prices, and a marked cooling of the June Consumer Price Index (CPI). All signs indicated the resilience of the US economy, and the market believed the Fed did not need to rush to tighten monetary policy to combat inflation. But now, whether or not interest rates will be raised is a 50/50 question. The Fed is not ruling out raising interest rates. Yale University scholar and former senior Federal Reserve economist William English stated, "Whether supporting rate hikes or advocating for holding rates steady, there are compelling arguments. The Fed is now in a dilemma." Recent escalation of the conflict with Iran has led to a renewed surge in energy prices, raising market concerns that the previously reached peace agreement between the US and Iran is on the verge of collapse. Gasoline retail prices have risen across the US, and US Treasury yields have hit new highs. Furthermore, on July 24th, the Trump administration introduced a new round of tariffs, imposing tariffs of 10%-12.5% on 60 countries on allegations of forced labor. This move is a workaround for the Supreme Court's earlier ruling overturning the "Liberation Day tariffs." Eric Deaton, president of Wealth Alliance, stated, "The ongoing conflict in Iran continues to drag down the market, causing oil prices to surge again; coupled with the unwavering resilience of the labor market, resource supply shortages caused by the expansion of the artificial intelligence industry, and the uncertain outlook for tariff policies, the Fed's 2% inflation target seems unlikely to be achieved in the short term. The current 30-year Treasury yield is around 5.18%, a near 20-year high. Market pricing currently indicates a 30%-40% probability of the Fed raising interest rates at least once before the end of this year. Given the current special circumstances, I agree that the Fed will most likely have to start raising interest rates." Warsh stated: FOMC monetary policy is anchored to "price stability." "Monthly price fluctuations are unavoidable, especially in a volatile global environment. However, the long-term core inflation level is largely determined by monetary policy." On July 14-15, Federal Reserve Chairman Kevin Warsh submitted his semi-annual Monetary Policy Report to Congress, making the above statement in his prepared remarks. The report, released on July 10, pointed out that the future trend of interest rates is "highly uncertain." The report also assessed the US economy: despite the significant uncertainty brought about by the Middle East conflict, the overall economy continues to maintain a robust expansionary trend. Warsh repeatedly reiterated to members of the House and Senate the dual mandate entrusted to the Federal Reserve by Congress: to stabilize prices and promote full employment in the labor market through interest rate tools and balance sheet policies. These two objectives are inherently mutually constraining and extremely difficult to implement: interest rate cuts can boost employment but easily push up inflation, even triggering an inflationary spiral; interest rate hikes can curb price increases but will suppress the job market, raise overall borrowing costs, and further suppress economic activity. As previously reported, Warsh has repeatedly pledged publicly that the Federal Reserve will remain firmly committed to restoring price stability. The FOMC previously chose to maintain interest rates unchanged . At its June meeting, the FOMC members responsible for setting interest rate policy unanimously voted to maintain the federal funds rate in the 3.5%–3.75% range. However, the minutes of the June meeting showed that members disagreed on inflation risks and their impact on interest rate policy, with the dot plot revealing an increasingly hawkish bias. Just before the release of June's cooling inflation data, Federal Reserve Governor Christopher Waller issued a stern warning about inflation and its long-term effects. In his July 13th speech, Waller stated, "Regardless of the statistical method used, inflation is on an upward trajectory this year. At this stage, the persistently high core inflation is a major concern for me." Traders significantly increased their expectations for Fed rate hikes . As of July 24th, data from the widely followed CME FedWatch Tool showed that financial markets revised down the probability of rate hikes in the later stages of the year; market pricing indicated a roughly 65% probability of keeping rates unchanged in July and a 35% probability of a 25 basis point hike. This contrasts sharply with market expectations a week earlier—when the market bet nearly 90% on keeping rates unchanged in July. September expectations shift: Current trader pricing indicates a cumulative probability of at least a 25 basis point rate hike by the Fed before or during the September FOMC meeting, approximately 90%; Year-end tightening expectations: CME tool data shows the market tends to believe in a cumulative 50 basis point rate hike by the end of the year, reflecting market concerns about persistently high inflation. The expectation of a July rate hike has risen rapidly, primarily due to the following factors: escalating tensions with Iran have caused oil prices to break through key levels again in the short term; the implementation of the Trump administration's latest tariff policies; and the 30-year US Treasury yield reaching a near 20-year high. These factors have collectively increased market concerns about the sustainability of inflation. Furthermore, Warsh's reforms, including the removal of forward guidance, have left the market lacking clear policy signals, forcing it to quickly adjust pricing based on data and geopolitical events. This has led to a significant increase in the probability of a rate hike shown by CME Group tools within just one week. A balanced perspective is also worth noting . However, a balanced perspective is equally important. Although recent oil price surges due to geopolitical conflicts have pushed up inflation readings, many institutions believe that such energy price shocks are mostly one-off supply shocks rather than persistent inflationary pressures. As June data shows, once the situation in the Middle East stabilizes or supply recovers, oil prices will fall, and inflationary pressures will quickly subside. Morgan Stanley explicitly stated on July 22 that the latest CPI data shows core inflation stabilizing. The overall CPI fell 0.42% month-on-month in June, while core CPI dropped slightly by 0.02%. They predict no interest rate hikes are needed throughout 2026 and two 25-basis-point rate cuts in 2027. Their core logic is that the transmission of supply shocks to core PCE is very limited, typically lasting only 2-3 months, and will not significantly push up wage growth or broad price levels. StateStreet's chief economist, Simona Mocuta, emphasized in her analysis on July 21 that the housing market indicates monetary policy is already relatively tight, while the labor market is close to neutral; neither requires an urgent rate hike, supporting the Fed's decision to remain on hold throughout 2026. ConferenceBoard also released a report in mid-July stating that the month-on-month decline in June CPI has eliminated any urgency for a July rate hike, and they expect interest rates to remain stable throughout the year. Their core logic is that consumer resistance to high prices and the normalization of housing costs will effectively offset the impact of energy price fluctuations. A survey of economists further revealed that most professional forecasters expect the Federal Reserve to maintain stable interest rates throughout 2026, downplaying the market's over-pricing of a rate hike before the end of the year. At his first FOMC meeting as Fed Chairman, Warsh removed the forward guidance statement from the June policy statement. He and a group of Fed reform supporters argued that the central bank should follow market trends, rather than actively guiding them. Forward guidance involves the central bank communicating its economic outlook and interest rate plans to the market in advance, signaling whether to raise, lower, or maintain rates, thus avoiding market shocks. Supporters of forward guidance argue that this mechanism helps businesses, investors, and residents make informed financial decisions. Former New York Fed President Bill Dudley warned that the Fed's credibility is facing a test. He suggested that the Fed tighten monetary policy to achieve price stability and maintain central bank independence; the cost of delaying action far outweighs the pain of moderate tightening. Dudley wrote, "Inflation has been above the central bank's 2% target for five consecutive years. If the Fed acts slowly, the market will eventually believe that Warsh's tough stance on inflation is just empty talk."