Inflation Slowed in June, but These 4 Words From Kevin Warsh Suggest Interest Rate Hikes Are Still a Possibility This Year

A key number that many investors focus on these days is inflation. That's because if inflation is coming down, there's less of a need for the Federal Reserve to raise interest rates in order to get it under control. High interest rates aren't good for stocks as they increase borrowing costs for businesses and can wreak havoc on the stock market. In 2022, when rates began to climb, the S&P 500 (SNPINDEX: ^GSPC) had a disastrous performance, falling more than 19%.

The most recent inflation numbers for June were encouraging and showed that inflation was, in fact, cooling. But for new Fed chair Kevin Warsh, that may not be enough to suggest that it's under control.

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Why Warsh remains unconvinced

The Consumer Price Index report that recently came out for the month of June indicated that the annual inflation rate had fallen from 4.2% to 3.5%. The decline was welcome news for a market that has been worried that the war with Iran and overall geopolitical uncertainty may lead to higher inflation and not result in the rate cuts that investors may have hoped for under the new Fed chair.

But while the latest numbers were encouraging, Warsh told the House Financial Services Committee that "it's one data point." Those four words suggest that he isn't going to be easily convinced that inflation is under control. He has also indicated that he's looking for much more data.

I would feel more confident if we had better data to inform our decision making. We have a task force that's going to be focused on doing just that.

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Rates are still expected to rise this year

While there's plenty of uncertainty around the economy and what will happen with interest rates, there's not a strong case for them going down just yet. Even though inflation numbers may have looked better for June, Warsh is seeking more data points to get a broader view of the economy.

According to the FedWatch Tool from the CME Group, interest rates are likely to rise this year. Although for the next Fed meeting, rates are expected to remain the same, by the December meeting, the probability they'll remain unchanged is just 17%, and it's really a question of whether there will be just a single rate hike or more.

For investors, this could be disappointing to hear, but rate hikes may be a temporary measure to control inflation, as many people are still struggling in the current economy, and there could be a case for rate cuts in the future. Remaining invested in the market and holding index funds can still be a good move for long-term investors, as these types of policy changes may appear significant in the short term, but will matter less over a longer time frame.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.