US Federal Reserve expected to decide on rate hike in four weeks, Warsh says

Federal Reserve Chairman Kevin Warsh announced on Wednesday, July 1, during the European Central Bank Forum in Sintra, Portugal, that the US central bank will decide on whether to raise interest rates within four weeks. Warsh did not reveal which direction the discussion might take, stating only that the debate will be thorough. The announcement comes after the European Central Bank (ECB) raised interest rates on June 11 in response to inflation driven by the consequences of the war in the Middle East.

Although the US and Iran have reached a preliminary peace framework and energy prices are falling after a surge caused by the conflict, ECB models indicate that inflation in Europe is not expected to hit the 2% target before 2027. The US has a similar long-term inflation target of below 2%, but so far the Fed has kept rates steady. Energy in Europe is more expensive than in the US, but the war's effects have also impacted the US, leading to higher energy prices and rising inflation.

Global markets have been somewhat reassured by the ongoing US-Iran negotiations. On Wednesday morning, Brent crude was just above $72 per barrel, down from $120 per barrel at the peak of the war. However, Warsh pointed out that energy prices are not the only driver of inflation, emphasizing the surge of artificial intelligence (AI). "The AI shock is leading to a boom in capital expenditures," Warsh said, explaining that central bankers must decide whether it is inflationary. "Right now, companies are investing in the future because their expectation is the supply side of the economy will expand, and if it does, that has huge implications for monetary policy."