Warsh has repeatedly said that he wants a "good family fight" in interest rate-setting meetings. He's likely to get one this week.

At the Fed's meeting in June, half of the officials expected they would need to raise rates this year, while the other half thought they could hold rates steady. Warsh didn't show his hand and could tip the central bank in either direction.

Minutes from the June meeting revealed that if inflation dissipates, most officials favor holding rates steady or eventually lowering them. However, if inflation remains elevated due to a combination of stable job market conditions, strong AI demand, the Middle East conflict, and the effects of tariffs, almost all officials see the need to raise rates.

Several officials, including Fed governors Lisa Cook, Chris Waller, and Philip Jefferson, have suggested they're content to hold rates steady in July but would consider a rate hike if inflation doesn't cool further.

Other officials, including Dallas Fed president Lorie Logan, believe the time is now to act. Logan said in a speech in mid-July that inflation has been too high for too long and does not appear to be on track to return to 2%.

"I currently believe modestly higher interest rates would better balance the outlook and risks for the FOMC's maximum employment and price stability goals," Logan said.

The case for holding rates steady

The case for holding rates depends on inflation coming down in the next few months.

The June "core" Consumer Price Index, which excludes volatile food and energy prices, offered a welcome relief. Core CPI dropped to 2.6% from 2.9%, as a near 10% decline in gasoline prices helped pull headline inflation down to 3.5% from 4.2%. Still, that's only one month, and tensions have flared in the Middle East, sending oil prices north again.

Wilmington Trust chief economist Luke Tilley said he expects the next couple of inflation reports to show a downward trajectory after core inflation, as measured by the Personal Consumption Expenditures Index, peaked at 4.8% on a three-month annualized basis in February.

Tilley noted that while there are risks that the war's impacts on energy costs could flow through to core inflation, "it hasn't yet."

Tilley maintained that the economy is strong enough to avoid a recession but not strong enough to drive up inflation, because US consumers cannot afford to spend at the gas pump while also spending in other categories, such as dining out. If oil prices go above $100 per barrel, as they did last week, people will cut back on spending, and high inflation will come entirely from gas, he said.

He said he doesn't think the Fed will hike interest rates this week, and he expects the Fed's next move to be a cut — not a hike — in September, followed by another cut after that.

"If they hike [in July], I think they're going to have to reverse it within six months," Tilley said.

New York Fed president John Williams also believes inflation has peaked and suggested holding rates steady rather than raising them.

"There are encouraging reasons to expect that inflation has peaked and should edge down in coming quarters," Williams said on July 15, citing a decline in energy and housing prices. He also thinks the inflationary effects of tariffs have largely played out, even as the Trump administration replaced expiring tariffs with new ones.

The case for hiking

Other officials aren't assured that inflation is heading in the right direction, given elevated energy prices in the wake of the Mideast conflict.

They point to shock after shock — from the pandemic to Russia's invasion of Ukraine to tariffs and now the Mideast conflict — that have kept inflation above the Fed's 2% goal for more than five years. They also reference the raging demand for AI infrastructure components that have pushed up prices.

These officials question whether they can look through the surge in energy prices and whether rates at current levels are restrictive enough.

"If inflation isn't starting to move back down, or even if it starts to move back up because we don't really know what's going to happen with oil prices at this point, … I think they've got to take seriously that a recalibration may be the right thing to do," Mester said.

George said that energy prices are still going to remain higher and that fresh tariffs may present a second round of price hikes.

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"You've got more than five years being above your target," George said. "The chairman has made a lot of strong comments about inflation being a choice, and so how will he align that with action around today's inflation?"

Warsh has repeatedly said that the Fed will deliver price stability, but hasn't offered guidance on interest rates or on how the central bank will accomplish that.

"I think taking one step could be enough to kind of solidify inflation expectations and then take it as the economy evolves because I know Warsh is really expecting this supply side relief at some point," George said.

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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