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WASHINGTON (AP) — The Federal Reserve is expected to keep its key interest rate unchanged when it meets Tuesday and Wednesday, but chair Kevin Warsh is under increasing pressure to hike rates soon, a move that could provoke ire from President Donald Trump, who appointed him.

The Iran war has reignited, pushing oil and gas prices higher — a trend that will worsen inflation in the coming months. Soaring investment in the artificial intelligence buildout is raising the cost of laptops, smart phones and electricity. And price hikes from tariffs could be in the pipeline after Trump imposed new duties on dozens of U.S. trading partners.

All those trends might lead to only temporary price increases, rather than a sustained burst of inflation similar to the spike in 2021-2022. Yet inflation, according to the Fed’s preferred measure, has topped its 2% target for more than five years, making it harder for the Fed to ignore price spikes, no matter how brief. Core inflation, which excludes the volatile energy and food categories, has risen since last December and has been stuck at around 3% or higher since 2023. Without noticeable progress soon, some Fed officials have said rate hikes will be needed.

“Unfortunately, inflation does not appear to be headed sustainably back all the way to 2%,” Lorie Logan, president of the Federal Reserve Bank of Dallas, said recently. “Modestly higher interest rates would better balance the outlook.” Logan is a voting member of the Fed’s rate-setting committee.

Warsh’s tough talk

Warsh, since taking over as chair in May, has emphasized that the Fed will get inflation back to 2% without specifying how. In his first news conference as chair last month, he made clear he wouldn’t provide the kind of signals about the Fed’s next steps that his predecessors, particularly Jerome Powell, did.

But in congressional testimony earlier this month Warsh said the Fed has “no tolerance” for higher inflation. And in the first statement on rates issued under his watch, the central bank pledged that it “will deliver price stability.”

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Such comments, along with the resumption of the Iran war and the renewed climb of oil and gas prices, have already lifted borrowing costs. The yield on the 10-year Treasury note — which strongly influences mortgage rates — briefly topped 4.7% last Thursday, the highest in about 18 months.

But Warsh’s tough talk raises expectations that he will follow through with action, current and former Fed officials say.

James Bullard, a former president of the St. Louis Fed, said Warsh’s rhetoric “has been very effective” in establishing Fed credibility, “but markets are going to ask, ‘Well, what have you done for me lately?’ And they’re going to demand action.”

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At the same time, more Fed officials appear to be growing impatient with inflation’s stubbornness.

“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 July 13 speech. If core inflation keeps climbing, the Fed’s rate-setting committee “will need to consider” hiking rates “in the near term,” he said.

Beth Hammack, president of the Cleveland Fed, said in a post on LinkedIn earlier this month that for the first time she is hearing business leaders call for higher rates, which is unusual since they typically support cheaper borrowing. She is also hearing from consumers “who can’t make ends meet about a growing sense of despair,” Hammack wrote.

Signs of inflation potentially improving

There is still tremendous uncertainty about what the Fed should do in the coming months, economists said. The most recent inflation report showed that core inflation cooled noticeably in June, and headline inflation fell sharply as gas prices declined almost 10%, a sign of what could happen if the Iran conflict is permanently resolved.

The cost of apartment rents, which spiked in the pandemic, is growing much more slowly than a few years ago.

John Williams, president of the New York Fed and vice chair of the Fed’s rate-setting committee, said this month that “there are encouraging reasons to expect that inflation has peaked and should edge down in the coming quarters.” He cited the decline in gas prices, before the Iran war restarted, and argued that the impact of tariffs on inflation has largely run its course. Even with new tariffs in place, they are likely to have the same limited effect of the ones they replaced.

Yet the resumption of fighting in the Middle East has pushed gas prices back above a nationwide average of $4 a gallon, from just below $3.80 around the July 4 holiday. The increase will likely push headline inflation higher, just before the Fed meets again in September. And adding to the Fed’s challenge, higher interest rates can slow demand and bring down inflation, but they can’t do much to restore oil and gas supplies disrupted by war.

“The Fed is looking at inflation well above goal, but mostly for reasons that it doesn’t have any influence on,” Vincent Reinhart, chief economist at Dreyfus-Mellon and a former top Fed economist, said.

Warsh says Fed to keep inflation from ‘broadening’

In congressional testimony this month, Warsh suggested the Fed’s job is to prevent specific price increases for things like gas or computer gear from “broadening out” to other parts of the economy.

Traditionally, the Fed would do that by hiking rates if there were signs higher prices were spreading. But Warsh may hope that his tough talk, which has pushed up some borrowing costs, will suffice in the end.

“They are hoping and intending to talk the talk without having to walk the walk,” said Stephen Douglass, chief economist at NISA Investment Advisors and former analyst at the New York Fed. He doesn’t expect the Fed will raise rates this year.

Other economists say inflation won’t be defeated without action by the Fed.

“There has never been a time when inflation gradually moderated without impetus from the Fed,” Joseph Lavorgna, a former top economist at the Treasury Department and chief economist at SMBC Americas, said. “In other words, core inflation is not going to magically slow.”