Why 3 Fed dissenters say waiting to raise interest rates could make inflation harder to tame

By Jeffry Bartash

Inflation has topped the Fed's 2% target for more than five years

The trio of dissenters at the Federal Reserve who backed an increase in interest rates this week contend high inflation could get entrenched in the economy unless the central bank acts decisively to get prices under control.

The Fed voted 9-3 on Wednesday to leave a key U.S. interest rate unchanged even though inflation is running close to 4%, almost double the central bank's goal. Inflation has strayed above the Fed target for more than five years.

The majority, led by new Chair Kevin Warsh, wanted to wait for more evidence to see if inflation would continue to slow. Prices fell in June for the first time since the 2020 pandemic after a decline in oil prices.

The dissenters expressed doubt that inflation would slow toward the Fed's 2% target without higher interest rates. Higher rates tend to depress economic growth and restrain inflation.

"Inflation has remained stubbornly above 2% for more than five years, and I am not confident it will return to our objective on its own," said Beth Hammack, president of the Cleveland Fed and an outspoken supporter of higher rates.

Hammack was one of the three dissenters, along with Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan. It was the most dissents in a decade at a normally unified Fed.

None of the seven Fed governors in Washington went along. The bloc of governors would have to splinter before a majority of Fed voters in favor of a hike could carry the day.

Many Wall Street DJIA SPX economists contend the Fed should raise rates to restrain inflation and clear doubts about its resolve to meet its 2% goal.

The view is by no means unanimous.

Some economists say the labor market is somewhat fragile, for one thing. The housing market has also been depressed by high mortgage rates and high prices - a source of frustration for many people who want to buy a home.

What's more, the recent run-up in inflation was largely driven by the war with Iran and resulting increase in oil prices. The Trump tariffs also played a role. Economists refer to these events as "shocks" that can be sudden and unpredictable, but don't tend to raise inflation in the long run.

Economic theory typically suggests the Fed not take action when inflation is rising due to these sorts of shocks, with the idea that inflation will slow once the shocks go away.

Fed rate hikes would do little or nothing to bring down oil prices, for instance.

Most Fed officials were willing to wait to see if the conflict with Iran is resolved - an outcome that would reduce oil prices and ease U.S. inflation.

Kashkari questioned that approach.

He said that evidence from a U.S. bout of high inflation in the 1970s shows that a series of shocks that raise prices can harden over time into permanently higher inflation.

"Policymakers [in the 1970s] ultimately concluded that tight monetary policy was necessary to bring inflation back down despite their original supply shock diagnosis," Kashkari said in a statement on Friday morning.

Warsh has vowed the Fed will vanquish inflation and meet its 2% goal, but Wall Street investors have grown more doubtful. They question whether he will back up his tough talk by raising rates if necessary.

Warsh was appointed by President Donald Trump, who has made no secret of his desire for the Fed to lower interest rates. Warsh has insisted he and the Fed would act independently and do whatever it takes to tame inflation.

"You've heard this before, but we will deliver price stability," he said Wednesday after his second meeting as Fed chief.

The dissenters said the first step toward achieving that objective would be to start raising interest rates incrementally. They contended the economy and labor market are strong enough to support such a strategy.

"If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary," Kashkari said.

"On the other hand, if inflation durably fades, a strategy of small policy steps would allow the [Fed] to slow or pause subsequent adjustments without unnecessary impact on the real economy," he said.

-Jeffry Bartash

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07-31-26 0948ET