The US Federal Reserve is expected to hold rates on Wednesday, although investors were pricing in a 32% chance of an increase on Tuesday night, with analysts describing the decision as the most uncertain in years.
The highly anticipated Federal Reserve policy meeting on Wednesday comes amid uncertainty over whether policymakers are losing patience with inflation and, if so, whether they are ready to turn their frustration into action. Expectations are tilting towards 'not yet'.
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US economists largely expect the Fed to leave rates unchanged this time, but see the risk of a hike as significant, with many pricing in a rate rise for September.
The monetary policy decision comes as renewed tensions in the Middle East have sent oil prices soaring again, reigniting concerns that inflation could keep climbing in the world's biggest economy.
Besides the Iran war, other factors adding to inflationary pressure include President Donald Trump's tariffs on foreign goods and a surge of investment in data centres to power artificial intelligence, which is driving up the cost of computer chips, equipment and electricity.
A tamer-than-expected inflation report on June consumer prices seemed to offer officials breathing room to keep rates stable, with headline inflation coming in at 3.5% year-on-year, down from 4.2% in May, and core inflation at 2.6%, following a 2.9% reading in May. The decline was largely driven by changes in energy prices.
Inflation has been stuck above the Fed's 2% target for more than five years. New Fed Chair Kevin Warsh told Congress earlier this month that he had "no tolerance'' for elevated inflation. Warsh is presiding over his second policy meeting this week.
Fed watchers Joseph Egelhof and Guneet Dhingra at BNP Paribas Securities say "policymakers' patience with high and persistent inflation is broadly exhausted, meaning there is a significant risk'' of a rate hike in September.
The federal funds target range has stood at between 3.50% and 3.75% since December 2025.
ING's regional head of research for the Americas, Padhraic Garvey, said: "The logic for no change centres, in part, on the calming in June inflation readings. President Trump has also helped pave an unchanged bias given the seeming renewed halt to hostilities with Iran. And from a macro perspective, the US economy is exhibiting vulnerabilities outside of tech."
Policymakers may also want to see more economic data. On Thursday, the Commerce Department will deliver the first look at economic growth between April and June and publish the Fed's preferred inflation measure – the personal consumption expenditures (PCE) price index – for June.
Overall, more than 30% of Wall Street traders predict that the Fed will raise rates this week, while 76% foresee a rate hike in September, according to the CME FedWatch tool.
Several Fed policymakers have also argued that the Fed will have to raise rates to return inflation to the 2% target.
"Sternly staring at inflation until it melts before our withering gaze is not an option,'' Christopher Waller, an influential member of the Fed's governing board, said in a speech this month.
