Big late-night bombshell! The new Fed boss, Waller, faces his first killer test: at the July meeting, either they raise rates or it’s off with his head—can your $BTC position still hold up?

Bro, let me walk you through it slowly. When Kevin Wosch first chaired a Federal Reserve meeting last month as chair, everyone unanimously agreed to keep interest rates unchanged. Back then there was no split, because nobody wanted to move them. But over the next few weeks, it got hard to balance this “bowl of water.”

Since then, several officials’ anxiety about inflation has clearly intensified. On the July 28–29 meeting, calls for rate hikes could get even louder. When Wosch testified before Congress this week, he already had a key piece of data in hand—the June inflation report.

The root of the debate goes back to last year. At the time, the Fed feared the labor market would break down, so it cut rates three times. But some officials had always felt the latter two cuts were unnecessary. Now, these people are effectively starting to argue for reversing those cuts.

The economic backdrop has changed—especially the labor market, which looks more stable than it did at the peak of panic last year. More and more officials worry that this resilience will keep inflation pinned above 2% for good. A surge in oil prices triggered by the war in Iran temporarily pulled the Fed’s focus away from the economy and back to inflation.

Oil prices have fallen quite a bit from wartime highs, but that hasn’t provided much comfort. Now supporters of rate hikes are no longer only watching energy. Import tariffs on goods, war-driven disruptions to energy and fertilizer supply, and the AI boom—everything is being seen as a factor pushing prices up.

The Fed rarely encounters inflation driven by special factors that is also especially sticky. Its traditional models always assume inflation is broadly spread, with the labor market as a core variable. Last month, Kashkari, president of the Minneapolis Fed, said in a panel discussion: “Most of the tools we use to analyze inflation start with the labor market. But the labor market is not the cause of inflation. This is a particularly stimulating time for us.”

In the monetary policy report released by the Fed last Friday, it said wage growth broadly matches an inflation rate of 2%. This is the first time in the past five years that the semiannual report has written it that way. If wages aren’t the problem, inflation is more likely to be coming from places that the common models can’t predict.

The June consumer price index (CPI) report will land on Tuesday and could directly shape this fight. If “core” inflation excluding food and energy is still stubbornly holding up through the summer, hawks will have stronger reason to act. If the data weakens, the case for waiting will be even stronger.

Officials who support rate hikes share a common premise: after last year’s cuts, policy may have been more accommodative than the Fed originally thought, and the economy no longer needs that kind of support. When the Fed cut rates last year, it expected inflation to be only slightly above 2%, but in reality it kept hovering between 3% and 4%.

So the Fed’s current target range of 3.5% to 3.75% effectively means rates are close to zero—or even negative—in real terms, with stimulus more than originally envisioned. At the same time, the labor market weakness the Fed worried about never showed up. This has pushed some officials toward making a modest adjustment—not a broad rate hike. First, roll back those precautionary measures that are no longer needed, then pause to observe.

James Egelhoff, chief U.S. economist at BNP Paribas, said this reflects positive changes in the labor market and the inflation concerns that need to be taken into account; he expects the Fed to hike rates three times at the latest by December.

Some officials who previously supported cutting rates are now also considering rate hikes. That shift itself indicates the situation has changed. Fed Governor Waller, who pushed for caution when the Fed cut rates last year due to concerns that the job market would weaken, said last week that the risks had “completely flipped,” and his view on the rate path has changed too.

The patient camp argues that if inflation is caused by a series of one-off shocks, the Fed should “see through” the pressures. As long as households and businesses expect inflation to fall, the central bank doesn’t need to react immediately. The hardest thing to “see through” may be AI infrastructure buildout.

Price shocks from tariffs and oil prices are limited in what the Fed can do. But the tens of billions of dollars flowing into data centers represent persistent demand, and interest rates can directly suppress that kind of demand. Williams, president of the New York Fed, said last week that semiconductor and power equipment prices usually rise slowly, but in charts they look like a “hockey stick.”

If this kind of demand keeps driving a supply-demand imbalance, he said that’s a situation the Fed can’t “see through.” Williams said rates are “in a reasonable place,” meaning there’s no special urgency for sharp adjustments in the near term, but it depends on whether inflation continues cooling in the second half.

Williams specifically noted that if the tariff effect wanes, he wants monthly core inflation readings to be 0.2% or lower—annualized, close to the 2% target. He said he “actually hopes it could be lower.” If growth is faster, it would imply inflation is more persistent and demand exceeds supply, meaning monetary policy would need to respond.

As vice chair of the rate-setting committee, Williams has been close to the core circle helping the chair set policy. His continued push for patience suggests that hawks haven’t reached consensus yet on a July hike. Since Wosch himself rarely makes public statements, July’s decision becomes especially important—that will be the first real signal to the outside world about how he runs the Fed.

Some market analysts say Wosch may choose to stand with the camp hoping to hold steady—even if it draws one or two dissenting votes—while waiting for more data to calm the debate. Another option is to directly push for rate hikes, either to reinforce the credibility of his commitment to price stability or because he believes hikes are unavoidable.

Williams has already dismissed the argument of “maintaining credibility by acting.” He said the decades-long reputation is built on making the best possible decisions based on existing data—not trying to shape credibility through monetary policy.

Some people who believe the Fed will ultimately hike rates also admit that Wosch may not necessarily need immediate action to signal his stance. After the June meeting, BNP Paribas’ Egelhoff judged that the chair is more inclined to continue waiting when there is room to do so; in his words, “If he has room to wait, he will choose to wait.”

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