On Monday morning, Federal Reserve Governor Christopher Waller stood before a room of economists in New York and said something the markets had been hoping to avoid: if Tuesday's inflation data comes in hot, the Fed may have to raise interest rates.
"If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term," Waller said at an event hosted by the New York Association for Business Economics.
That meeting — the Federal Open Market Committee's July 29 session — is two weeks away. And thanks to the war in Iran, the odds of Waller getting that hot reading are higher than they've been in years.
Here's how it connects. The on-and-off blockade of the Strait of Hormuz — the narrow maritime chokepoint that handles 20% of the world's oil supply — has sent energy prices surging. Higher energy costs mean more expensive diesel. More expensive diesel means higher shipping costs on everything hauled by truck: food, consumer goods, construction materials. Core inflation, which is supposed to strip out energy, has remained stubbornly elevated because energy costs are no longer contained to the gas pump. They've already seeped into the price of almost everything.
This is Biden's Iran policy legacy hitting American wallets in 2026.
The data this week will tell us how far it's gone. June's Consumer Price Index drops Tuesday morning. The expectation is some relief — a 0.1% monthly decline, with the yearly figure slipping to 3.8% from 4.2%. The Producer Price Index follows Wednesday, also expected lower at 6.2% annually versus 6.5% the previous month. One good month would be welcome. Waller said it wouldn't be enough.
"After its escalation over the first half of this year, I will need to see several months of lower readings to feel that inflation is moving in the right direction," he said.
The Fed's inflation target is 2%. It has been above that target for five years.
Markets are split. According to CME FedWatch, about 60% of traders still expect the Fed to hold rates at their current 3.5% to 3.75% range at the July meeting. But roughly 40% are now pricing in a quarter-point rate hike — a sharp reversal from earlier this year, when investors were counting on continued cuts after three consecutive rate reductions in 2025.
Forty percent is not a majority. It's also not a fringe bet. When the professionals who trade on Fed decisions every day are nearly split, it means nobody knows what's coming — including, almost certainly, the Fed itself.
That ambiguity is partly by design. Kevin Warsh, Trump's nominee who became Fed chairman earlier this year, has argued that markets function better when they react to actual data rather than trying to interpret the Fed's advance signals. He refused to participate in the "dot-plot" projections last month — the first Fed chair in recent memory to do so. His approach: tell people what you decided, not what you're thinking about deciding.
What Warsh decided at his first meeting surprised some observers. Trump had publicly said he'd only nominate someone ready to cut rates. Warsh came out hawkish — taking a strong anti-inflation stance that made clear he wouldn't be cutting simply because the president wanted it. That's independence. And on a five-year inflation problem that outlasted one administration and is now threatening to outlast another, independence from political pressure is exactly what the moment requires.
Waller left himself room in both directions. He said there's a "credible case" that inflation will trend back toward 2%. He also said there's an "equally plausible case" it stays elevated or moves higher, requiring tighter policy. He was direct about what the data calls for if that happens: "When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation."
And then the line that should be on a bumper sticker: "Sternly staring at inflation until it melts before our withering gaze is not an option."
Tuesday's CPI will tell us which case we're in.
