Some economists want Federal Reserve Chair Kevin Warsh to raise interest rates at today’s meeting. They argue the central bank’s 2025 cuts left policy too loose, even as inflation sits above target.

Joe Lavorgna makes that case directly. He serves as chief economist for the Americas at SMBC Nikko Securities America. Lavorgna says the Fed should reverse part of last year’s easing now that the labor market has stabilized. In his view, cutting rates while price growth remained elevated risked letting inflation expectations drift, and a corrective move would restore credibility.

The Case for a Hike

Lavorgna points to core Personal Consumption Expenditures (PCE) inflation, the Fed’s preferred gauge. Core PCE strips out volatile food and energy prices to reveal the underlying trend, and it has held more than a percentage point above the 2% target for years. For hawks, a persistent gap of that size is evidence that policy has not done enough to cool demand.

He argues policy isn’t tight anywhere except housing, and that sector makes up only about 3% of the economy, in his view. If borrowing costs are only restrictive in one narrow corner of the economy, the argument goes, the overall stance is effectively accommodative.

Lavorgna also expects the neutral rate, or r-star, to climb. The neutral rate is the theoretical level at which policy neither stimulates nor restrains growth. Artificial intelligence-driven capital spending is lifting demand for credit, he says, which makes current rates look less restrictive than policymakers assume. When r-star rises, a given policy rate becomes easier in real terms, strengthening the case for tightening. Dallas Fed President Lorie Logan has echoed that hawkish tilt.

“Modestly higher interest rates would better balance the outlook.”

Logan made the remark last week. She holds a voting seat on the Federal Open Market Committee (FOMC), the panel that sets U.S. interest rates, so her leaning carries direct weight in the decision.

A Hike, But Is It a Surprise?

CNBC’s Steve Liesman frames the debate as two separate questions. First, should the Fed hike? Second, should it do so without warning? Traders on the CME FedWatch tool priced hike odds near 38% heading into the decision. That’s well below a coin flip, and it matches what most economists still expect: a hold. A move against those odds would qualify as a genuine surprise, the kind that tends to jolt equities, bonds and digital assets alike as traders reprice risk.

Warsh took over the Fed in May and has since pulled back on forward guidance, the practice of signaling future policy in advance to shape market expectations. That leaves markets with fewer hints before today’s 2 p.m. ET announcement and his 2:30 p.m. press conference, and it raises the odds that any decision lands with more force than usual.

Warsh himself predicted this meeting could bring open dissent among policymakers. A hike would make that prediction look prescient, and it would mark his most consequential test yet. For crypto and other risk assets, the takeaway is straightforward: tighter policy and higher real yields typically pressure valuations, so both the outcome and the tone of the press conference will be watched closely.

Source: BeInCrypto