Fed Expected to Keep Rates Unchanged   07/29 06:07

   Federal Reserve policymakers are losing patience with inflation, but they 
may not be ready to turn their frustration into action -- not this week anyway.

   WASHINGTON (AP) -- Federal Reserve policymakers are losing patience with 
inflation, but they may not be ready to turn their frustration into action -- 
not this week anyway.

   Meeting in Washington Tuesday and Wednesday, the Fed is expected to keep its 
benchmark interest rate unchanged. Members of the central bank's rate-setting 
committee may not be so reluctant to act when they gather again next Sept. 
15-16.

   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 
it's possible Warsh's central bank will "release the kraken'' with a "shock 
rate hike'' this week; more likely, they wrote in a commentary, policymakers 
will hold off, reluctant to risk disrupting financial markets that aren't 
expecting a rate increase yet.

   Policymakers may also want to see more economic data: On Thursday, the 
Commerce Department delivers the first look at April-June economic growth and 
issues the Fed's preferred inflation measure -- the personal consumption 
expenditures (PCE) price index -- for June.

   Overall, only 29% of Wall Street traders predict that the Fed will raise 
rates this week. But 76% foresee a rate hike in September. A month ago, only 
59% of traders expected a September rate increase, according to the CME 
FedWatch tool.

   "Policymakers' patience with high and persistent inflation is broadly 
exhausted, meaning there is a significant risk'' of a rate hike in September, 
Egelhof and Dhingra wrote.

   Casting uncertainty over the Fed's decision-making is the Iran war. The 
price of oil briefly blasted past $100 a barrel last week on intensifying 
fighting. It's since settled down on hopes the United States and Iran can find 
some way to reduce tensions.

   After the U.S. and Israel attacks on Feb. 28, Iran shut down the Strait of 
Hormuz -- through which a fifth of the world's oil and natural gas pass. That 
caused the greatest disruption in oil supplies in history and sent energy 
prices surging. They've since bobbed up and down depending on the ever-changing 
state of the conflict and negotiations to de-escalate it.

   Now Iranian-backed Houthi rebels from Yemen are attacking shipping in the 
Red Sea, attempting to stop tankers carrying Saudi Arabian oil from passing 
through the Bab el-Mandeb Strait.

   The uncertainty puts the Fed's inflation fighters in a bind.

   "Sure, it is possible that the latest rise in prices is a transient blip 
that will reverse in a heartbeat. Then again, it seems equally that the war 
with Iran will get worse, that the Strait of Hormuz and Bab al-Mandab will 
remain blockaded for months or longer, and that energy prices will continue to 
trend up,'' Carl Weinberg, chief economist at High Frequency Economics, wrote 
in a commentary.

   "Should the (Fed) set monetary conditions on a hope that oil prices will 
reverse course and stay low ... or should a central bank eschew wishful 
thinking and do its job of minimizing the probabilities that inflation will 
exceed target?''

   Inflation has exceeded the Fed's 2% target since early 2021 when the U.S. 
economy overheated as it roared back from COVID-19 lockdowns. Inflation peaked 
at just over 9% in mid-2022 and began to drop in the face of 11 rate hikes by 
the Fed in 2022 and 2023. But progress has more or less stalled.

   Besides the Iran war, other factors adding to inflation pressure are 
President Donald Trump's tariffs on foreign goods and a surge of investment in 
data centers to power artificial intelligence, which is driving up the cost of 
computer chips and equipment and electricity.

   So-called core inflation -- which excludes volatile food and energy prices 
-- cooled in June, partly because apartment rents aren't rising as fast as they 
had been. And a temporary drop in gasoline prices last month also helped 
contain overall inflation.

   But several Fed policymakers have been arguing 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.